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Elementary    Accounting 
Problems 


BY 


JOHN   RAYMOND  WILDMAN,  M.C.S.,  C.P.A. 

Professor  of  Accounting  in  New  York  University 
School   of    Commerce^    Accounts    and    Finance 


1914 

THE  WILLIAM  G.  HEWITT  PRESS 

61-67    NAVY    STREET,        -        BROOKLYN,    NEW    YORK 


rtf 


Copyright,  1914 


JOHN  RAYMOND  WILDMAN 


TABLE  OF   CONTENTS 


Problem  No.  1.  Sole  proprietorship.  Single  entry.  Profits  deter- 
mined by  asset  and  liability  method Page  1 

Pkoblsm  Na  2.  Sole  proprietorship.  Conversion  from  single  to  dou- 
ble entry.  Profit  and  loss  method  of  determining  gains  and  losses. 
First  step  in  the  evolution  of  the  statement  of  income  and  profit 
and  loss.    Introduction  of  the  wcK-king  sheet Page  8 

P&OBLEM  No.  3.  Sole  proprietorship.  Second  step  in  the  evolution  of 
the  statement  of  income  and  profit  and  loss.  Working  sheet 
discussed.  Establishing  balances  through  complementary  ac- 
counts. Trading  and  profit  and  loss  account.  Simple  balance 
sheet Page  17 

Problem  No.  4.  Sole  proprietorship.  Third  and  final  step  in  evolu- 
tion of  statement  of  income  and  profit  and  loss.  Variation  of  the 
working  sheet.  Planning  the  accounts.  Comparative  statement 
of  income  and  profit  and  loss.    General  balance  sheet Page  29 

Problem  No.  5.  Copartnership.  Sale  of  share  in  sole  proprietorship. 
Goodwill.  Adjustments  not  requiring  working  sheet.  Man- 
ufacturing, trading  and  profit  and  loss  accounts.  Balance 
sheet Page  38 

Problem  No.  6,  Copartnership.  Depreciation.  Interest  on  invest- 
ments. Elaborate  statement  of  income  and  profit  and  loss. 
Schedule  showing  distribution  of  profits.  General  balance 
sheet Page  50 

Problem  No.  7.  Copartnership.  Sale  of  interest  in  going  concern. 
Adjustment  of  lease.  Closing  accounts  of  sole  proprietor.  Open- 
ing accounts  of  copartnership Page  59 

i 


325476 


TABLE    OF   CONTENTS 

Problem  No.  8.  Copartnership.  Salary,  drawings  and  interest  an 
capital  of  partners.  Balance  sheet.  Statement  of  income  and 
profit  and  loss.  Schedule  showing  gross  profit  by  classes  of 
merchandise Page  65 

Problem  No.  9.  Copartnership  dissolution.  Death  of  partner.  Broken 
periods.  Cost  determined  by  gross  profit  method.  Equal  sharing 
of  profits,  irrespective  of  investments.  Balance  sheet.  Statement 
of  income  and  profit  and  loss Page  76 

Problem  No.  10.  Copartnership  liquidation.  Compensation  to  sur- 
viving partners  for  liquidating.  Goodwill  valueless.  Cash  account. 
Profit  and  loss  account.  Proprietorship  accounts  of  the  part- 
ners   Page  85 

Problem  No.  11.  Incorporation.  Financial  and  stock  records.  Formal 
method  of  setting  up  capital  stock  accounts.  Opening  journal 
entries.  Skeleton  ledger  accounts.  Corporate  balance  sheet. 
Stock  book.     List  of  stockholders Page  92 


Problem  No.  12.  Incorporation.  Taking  over  copartnership.  Adjust- 
ments due  to  discrepancies  in  assets  and  liabilities.  Organizati<m 
expense.  Journal  entries  opening  books  of  the  corporation.  Bal- 
ance sheet  of  the  corporation.  Skeleton  ledger  accounts  showing 
closing  of  the  copartnership  books Page  102 


Problem  No.  13.  Incorporation.  Pro-forma  method  of  opening  the 
books.  Stock  issued  for  property  and  goodwill  of  copartnership. 
Balance  sheet.  Skeleton  ledger  accounts  showing  closing  of  the 
copartnership  books Page  109 

Problem  No.  14.  Incorporation.  Stock  issued  for  patents.  Stock 
donated.  Stock  sold  at  a  discount.  Capital  surplus.  Journal  en- 
tries opening  books.    Balance  sheet Page  116 


Problem  No.  15.  Corporate  form  of  organization.  Sinking  fund — 
creation,  operation  and  closing.  Purchase  and  cancellation  of 
bonds.  Working  sheet  substituted  for  skeleton  ledger  accounts. 
Balance  sheet Page  122 


Problem  No.  16.     Corporate  form  of  organization.    Amortization  and 
accttmtilation  of  bonds.     Sale  of  accrued  interest.    Revaluation  of 


TABLE    OF   CONTENTS 

securities.  Nominal  and  effective  interest.  Skeleton  ledger  ac- 
counts and  trial  balance.  Balance  sheet.  Statement  of  income 
and  profit  and  loss Page  131 


Problem  No.  17.  Merger  of  two  corporations.  Consolidated  trial 
balance.  Eliminations.  Entries  recording  the  merger  on  the  books 
of  each  corporation.    Balance  sheet  after  the  merger Page  140 


Problem  No.  18.  Consolidation  of  corporations.  Promotion.  Hold- 
ing company.  Control  of  subsidiaries  through  stock  ownership. 
Exchange  of  stock.  Consolidated  trial  balance.  Consolidated 
balance  sheet.    Balance  sheet  of  holding  company Page  148 


Problem  No.  19.  Organization  of  corporation  to  take  over  copartner- 
ship. Stock  donated  for  working  capital.  Subsequent  under- 
writing agreement  with  bankers.  Refunding  mortgage.  Premium 
and  discount  on  bonds.  Opening  entries,  balance  sheet  and  state- 
ment of  income  and  profit  and  loss  for  corporation.  Journal 
entries  and  skeleton  ledger  accounts  showing  dissolution  of 
copartnership Page  158 


Problem  No.  20.     Voluntary  bankruptcy,  sole  proprietor.     Personal 
estate  involved.  Statement  of  affairs.   Deficiency  account,  Page  168 


Problem  No.  21.  Insolvency  of  corporation.  Receivership,  Re- 
ceiver's certificates.  Reorganization.  Assessments.  Assenting 
and  non-assenting  stock.  Balance  sheet  after  reorganiza- 
tion  Page  176 


Problem  No.  22.  Receivership  for  limited  copartnership.  Uncom- 
pleted contracts.  Statement  of  affairs  and  deficiency  account. 
Business  restored  to  partners Page  187 


Problem  No.  23.  Insolvency.  Sole  proprietorship.  Stock  owned  in 
insolvent  corporation.  Estimated  value  of  stock.  Offsets  and 
contras.     Statement  of  affairs  and  deficiency  account.  ...Page  195 


Problem  No,  24,  Realization  and  liquidation  of  insolvent  sole  pro- 
prietor. Skeleton  ledger  account  showing  books  of  trustee 
and  percentage  which  unsecured  creditors  received  on  their 
claims Page  204 


TABLE   OF  CONTENTS 

Problem  No.  25.  Realization  and  liquidation  of  insolvent  sole  proprie- 
tor. Trustee's  statement  of  realization  and  liquidation ....  Page  211 

Problem  No.  26.  Dissolution  of  corporation.  Journal  entries.  State- 
ment of  realization  and  liquidation  showing  amounts  distributed 
to  stockholders Page  214 


INTRODUCTION 

It  is  probably  not  an  extravagant  statement,  to  say  that  all 
accounting  problems  prepared  for  the  use  of  students,  or  set  at 
examinations  to  test  their  knowledge  of  practical  accounting, 
have  points,  or  principles,  embodied  in  them  which  it  is  intended 
shall  be  uncovered  or  dug  out  by  the  student.  The  man  who 
prepares  a  problem  purposely  puts  something  into  it.  The 
student's  task  is  to  get  that  something  out. 

In  that  they  are  built  around  certain  principles  all  problems 
are  similar.  Thus  it  becomes  possible  to  formulate  certain  gen- 
eral rules  governing  their  solution  somewhat  as  follows : 

1.  Read  the  problem  carefully,  from  the  first  word  to  the 
last. 

2.  Grasp  the  principles  embodied  in  the  problem. 

3.  Digest  the  contents  and  make  certain  that  the  object  of  the 
problem  is  understood. 

4.  Study  over  questionable  points  and  decide  on  how  they  are 
to  be  handled. 

5.  Prepare  a  mental  plan  for  solving  the  problem. 

6.  Give  as  an  answer  what  is  asked  for  in  the  problem. 
While  some  of  these  rules  are  so  simple  as  to  seem  almost 

absurd,  it  is  surprising  to  note  how  many  excellent  students  have 
failed  in  examinations  through  a  violation  of  one  or  more  of 
them. 

Several  men  are  known  to  have  failed  in  C.  P.  A.  examina- 
tions because  they  did  not  take  time  to  read  the  first  or  the 
last  paragraphs  in  certain  problems,  with  care.  Some  men  have 
failed  because  of  ignorance,  nervousness,  or  for  lack  of  time.  It 
would  almost  be  safe  to  venture  the  opinion  that  the  majority  of 

^ failures  are  due  to  the  fact  that  candidates  do  not  give  what  the 
problem  calls  for.  This  is  known  to  be  true  in  the  case  of  one 
of  the  best  prepared  men  who  ever  attempted  the  state  exam- 
ination. 
The  problems  which  follow  have  a  double  purpose.  They 
are  intended  in  part  to  offer  an  opportunity  for  practice  in  the 


Elementary  Accounting  Problems 

solving  of  problems.  The  added  purpose,  and  perhaps  the  more 
important,  is  to  show  the  application  of  accounting  principles. 

With  this  in  view  the  problems  have  been  developed  logically 
following  in  the  main  the  four  prominent  types  of  organization. 
An  effort  has  been  made  in  the  first  eight  or  ten  problems  to  show 
what  the  writer  believes  to  be  the  evolution  of  the  modern  state- 
ment of  income  and  profit  and  loss.  The  text  and  comments 
will  show  the  reasons  which  are  believed  to  be  responsible  for 
its  development. 

The  first  group  of  the  series  deals  principally  with  sole  pro- 
prietorship. The  second  covers  copartnership  and  shows  the  con- 
version of  the  sole  proprietorship  into  the  copartnership.  The 
third  group  brings  out  the  transition  from  copartnership  to  incor- 
poration and  the  accounts  and  transactions  which  are  common  to 
corporations.  Consolidations,  mergers,  holding  companies  or 
trusts,  form  the  subject  matter  of  the  fourth  group. 

Because  of  the  fact  that  the  early  problems  appear  very  simple, 
the  impression  should  not  be  gained  that  they  are  all  the  same. 
Some  of  the  subsequent  problems  will  probably  be  found  suffi- 
ciently difficult  to  interest  the  keenest  mind. 

The  comments  have  in  places  been  left  somewhat  incomplete 
in  order  to  stimulate  original  thought  on  the  part  of  students  and 
to  offer  an  opportunity  to  instructors  to  bring  out  in  demonstra- 
tion the  points  passed  over. 

The  form  and  arrangement  of  the  financial  statements  used 
in  the  solutions  of  certain  problems  may  be  something  of  an  inno- 
vation. Some  of  the  statements  will  no  doubt  be  startling.  No 
claim  is  made  by  the  writer  for  their  originality.  They  are  pre- 
sented with  full  credit  to  every  one  with  whom  he  has  ever  come 
in  contact,  or  received  a  thought  or  idea  from,  and  most  espe- 
cially the  well-known  accounting  firm  with  which  he  served  his 
apprenticeship.  If  the  statements  provoke  discussion  they  will 
have  served  a  purpose.  If  the  book  succeeds  in  lighting  the  way 
for  even  one  struggling  student  it  will  not  have  been  in  vain. 

New  York  John  Raymond  Wildman. 

July  20,  1 914. 


VI 


ELEMENTARY  ACCOUNTING  PROBLEMS 


PROBLEM    No.    i 
Demonstration 


On  January  i,  1910,  Robert  J.  Dimlawn  began  business  as 
a  retail  drygoods  merchant.  His  capital  consisted  of  merchan- 
dise $2,300,  cash  in  bank  $150,  and  cash  in  hand  $50. 

The  business  appeared  to  prosper  from  the  beginning.  Most 
of  his  goods  were  sold  for  cash.  Some  were  sold  on  charge 
accounts.  His  credit  became  well  established  and  he  was  able 
to  buy  large  invoices  of  certain  lines  on  very  Hberal  terms. 

The  books  were  kept  by  single  entry  and  consisted  of  a  ledger 
and  a  journal.  It  was  the  custom  to  keep  individual  accounts 
with  the  charge  customers,  the  creditors,  and  the  proprietor. 

At  the  end  of  three  months,  or  on  March  31,  19 10,  Mr.  Dim- 
lawn  began  to  be  curious  as  to  whether  or  not  he  was  making 
any  money.  He  instructed  his  bookkeeper  to  have  the  pass- 
book balanced  at  the  close  of  business  on  that  date  and  to  count 
the  cash  in  the  store  after  the  business  of  the  day  was  over. 
The  clerks  were  set  to  work  taking  an  inventory  of  the  stock  on 
the  same  evening,  but  did  not  complete  the  task  when  they  were 
obliged  to  leave  for  the  night.  They  did,  however,  on  the  fol- 
lowing morning  keep  a  record  of  the  sales  until  such  time  as  the 
inventory  was  completed.  The  bookkeeper  balanced  off  all  the 
accounts  in  the  ledger  with  customers  and  creditors  as  of 
March  31st. 

Upon  the  conclusion  of  the  above-mentioned  work  the  fol- 
lowing results  were  obtained: 

Merchandise  stock  (cost  $9,062.62)  estimated  by 

the  proprietor  as  being  worth $10,000.00 

Accounts  receivable  (customers) 162 .  74 

Accounts  payable  (trade  creditors) 10,203 .21 

.Cash  in  bank 2,572.43 

Cash  in  hand 224.17 

The  figure  given  as  the  cost  of  the  inventory  includes  stock  in 

I 


^\  ^    :     Elementary  Accounting  Problems 

the  amount  of  $18.75  which  was  received  prior  to  March  31, 
1910,  but  had  not  been  credited  to  the  account  payable  when  the 
balances  of  such  accounts  were  taken  off,  but  does  not  include 
sales  made  on  the  morning  of  April  ist,  before  the  completion 
of  the  inventory,  the  cost  of  which  was  $200. 

Mr.  Dimlawn  instructs  his  bookkeeper  to  prepare  a  state- 
ment which  will  show  the  amount  of  the  profit  or  loss  for  the 
three  months  ended  March  31,  1910. 

Solution  to  Problem  No.  i 

A  careful  and  complete  reading  of  the  problem  reveals  two 
things.  The  thing  required  by  the  problem  is  the  first  one.  The 
manner  or  process  of  obtaining  the  information  is  the  second. 

The  bookkeeper  understands  that  he  is  to  prepare  a  state- 
ment showing  the  amount  of  the  profit  or  loss.  Such  is  the 
requirement  of  the  problem.  The  character,  or  form,  of  the 
statement  will  be  determined  by  the  information  available. 

The  facts  presented  enable  him  to  determine  two  things: 
first,  the  capital  of  the  proprietor  on  January  i,  1910,  and,  sec- 
ond, the  capital  on  March  31,  1910.  In  the  first  instance,  the 
task  is  simple.  In  the  second  instance,  it  is  slightly  more  com- 
plex, in  that  it  must  be  determined  by  comparing  the  liabilities 
with  the  assets. 

As  to  the  profit  or  loss,  it  is  obvious  that  it  will  be  determined 
in  either  case  by  a  comparison  of  the  capital  at  the  two  dates. 
If  the  capital  at  the  end  of  the  period  is  larger  than  at  the  begin- 
ning of  the  period,  provided  there  have  been  no  additions  of  capi- 
tal in  the  interim,  a  profit  must  have  resulted  from  the  conduct 
of  the  business.  If  the  capital  at  the  end  of  the  period  is  smaller 
than  at  the  beginning  of  the  period  unless  there  have  been  with- 
drawals of  capital,  a  loss  must  necessarily  have  been  the  result. 

The  source  of  the  information  in  this  case  it  will  be  noted 
is  not  confined  to  the  books.  Much  of  the  information  came 
from  sources  outside  of  the  books.  If  the  bookkeeper  had  been 
asked  for  the  amount  of  the  profit  and  loss,  instead  of  a  state- 
ment, he  might  have  determined  the  amount  from  his  books. 
This  he  could  not  have  done,  however,  until  he  had  gone  through 
practically  the  same  process  as  was  necessary  in  order  to  compile 
the  statement. 


Problem  Number  One 

The  books,  it  will  be  remembered,  were  kept  by  single  entry^ 
Pure  single  entry,  although  little  is  really  known  of  its  origin, 
and  early  history,  is  understood  to  have  embraced  three  classes 
of  accounts ;  those  with  customers,  those  with  creditors,  and  one 
with  the  proprietor.     The  customers'  accounts,  and  conversely 
the  creditors',  were  run  precisely  as  they  are  to-day,  showing: 
any  and  all  transactions  of  the  proprietor  with  the  individuals.. 
The  proprietor's  account  showed  his  invested  capital  at  the  be- 
ginning of  the  business  undertaking,  his  additions  or  withdraw-  ■ 
als,  and  through  a  single  entry  at  the  end  of  a  given  period  the- 
amount  of  his  capital  at  such  time.     Thus  by  the  segregation^ 
of  these  items,  and  comparing  the  capital  at  the  beginning  and 
end  of  the  period,  having  due  regard  for  additions  and  with- 
drawals of  capital,  it  was  possible  to  determine  the  amount  of 
the  profit  or  loss. 

It  should  be  borne  in  mind  that,  although  the  proprietor's 
account  showed  his  capital  at  different  times,  it  did  so  without 
regard  to  the  form  in  which  such  capital  existed.  Nor  did  his- 
ledger  elsewhere  show  such  facts  except  in  part.  Thus  a  manz. 
starting  in  business  with  merchandise  amounting  to  $2,300,  cash". 
in  bank  $150,  and  cash  in  hand  $50  would  have  but  one  entry" 
in  his  books.  Such  an  entry  would  appear  in  his  proprietor's' 
account  showing  an  investment  of  capital  of  $2,500. 

Leaving  out  of  consideration  for  the  moment  the  question 
of  additions  and  withdrawals,  it  will  be  seen  that  there  would, 
in  the  problem  under  consideration,  spring  up  from  time  to  time 
accounts  with  customers  and  creditors.    A  transaction  affecting 
one  of  these  customers'  accounts  would  be  made  once  in  the 
customer's  account  without  further  consideration.     A  customer ' 
would  be  charged  with  what  he  purchased  and  credited  with:? 
what  he  paid.    No  other  record  of  the  transaction  would  be  made, 
in  the  ledger. 

When  the  end  of  the  period  arrived  the  amount  of  the  capital ' 
might  be  ascertained  as  below  and  still  only  one  entry  of  $2,000 
would  be  made  in  the  ledger,  and  that  in  the  proprietor's  account : 

Merchandise $9,262 .  62 

Customers 162 .  74 

Cash 2,796.60 

$12,221.96 

Less — due  creditors 10,221 .  96 

Capital $2,000 .  00 

3 


Elementary  Accounting  Problems 

The  above  illustrations  bring  out  strongly  the  inadequacy  of 
^he  information  furnished  by  ledger  even  in  a  case  so  simple 
•as  the  one  in  question.  Any  method  of  keeping  the  books  ap- 
pears to  be  weak  when  it  becomes  necessary  to  obtain  so  much 
information  from  outside  sources. 

In  gathering  the  data  necessary  in  the  preparation  of  the 
statement  certain  difficulties  have  arisen.  Two  of  these  are  in 
connection  with  the  inventory,  while  one  concerns  the  accounts 
payable. 

With  regard  to  the  inventory,  the  question  must  first  be  set- 
tled as  to  whether  it  is  to  be  shown  at  cost  or  at  the  estimated 
value  placed  upon  it  by  the  proprietor.  No  matter  which  figure 
is  used  there  must  be  added  to  it  the  amount  of  $200,  represent- 
ing the  cost  of  goods  sold  previous  to  the  completion  of  the  stock- 
taking. 

The  question  of  valuing  an  inventory  is  troublesome  to  the 
accountant.  It  may  be  almost  as  troublesome  to  the  bookkeeper. 
If  he  has  his  choice  in  the  matter  he  will  presumably  price  the 
inventory  at  cost,  since  he  will  realize  that  increasing  the  value 
over  cost  is  to  anticipate  a  profit.  If  the  proprietor  insists  on 
fixing  the  value  he  will  probably  use  it  as  fixed,  but  if  he  is  a 
.conscientious  bookkeeper  he  will  call  attention  to  the  question- 
able practice. 

The  slight  difficulty  involving  the  accounts  payable  serves  to 
illustrate  one  of  the  rules  upon  which  statements,  such  as  this 
problem  calls  for,  rest.  The  accuracy  of  the  result  is  deter- 
mined by  the  accuracy  of  the  items  entering  into  the  factors 
which  produce  the  result.  Therefore,  in  order  that  the  correct 
result  may  be  obtained,  it  is  necessary  that  all  assets  and  all 
liabilities  be  included  and  that  all  items  be  correct.  Hence, 
when  the  statement  is  made  that  the  inventory  includes  an  item 
of  $18.75  which  has  not  been  credited  to  the  accounts  payable, 
it  becomes  necessary  to  adjust  the  liabilities  in  this  amount. 

The  statement  to  be  prepared  by  the  bookkeeper  might  vary 
according  to  individual  tastes.  Essentially  it  would  embody  the 
.facts  set  forth  in  the  following: 


Problem  Number  One 


ROBERT  J.  DIMLAWN 


Statement  Showing  Loss  on  Operations  for  the  Three  Months  Ended- 

March  31,  1910 


Capital — ^January  i,  19 10,  represented  by- 
Assets: 

Merchandise $2,300 .  00 

Cash  in  bank 150. 00 

Cash  in  hand 50 .  00 

$2,500. oa 

Capital — March  31,  1910,  represented  by 
Assets: 

Merchandise $9,262 .  62 

Cash  in  bank 2,572 . 43 

Cash  in  hand 224 . 1 7 

Accounts  receivable  (customers) ...  162.74 

Total  assets $12,221 .96 

Liabilities: 
Accounts  payable  (trade  creditors) 10,221 .96      2,000.00 

Loss $500. oa 

The  determining  of  profits  in  this  way  is  known  as  the  asset 
and  liabiHty  method.  It  is  intimately  associated  with  single  en- 
try. It  is  many  times  treated  slightingly  by  accountants,  but  it 
has  its  value  as  a  practical  expedient  many  times  in  instances 
where  the  question  of  whether  or  not  expensive  analytical  work 
shall  be  done  will  depend  upon  whether  or  not  the  expense  is 
warranted  by  the  result  which  will  be  obtained. 

Where  the  asset  and  liability  method  is  used  the  results  will 
be  affected  by  additions  and  withdrawals.  In  the  problem  under 
discussion,  if  Dimlawn  had  put  in  additional  capital  amounting 
to  $1,000  during  the  period,  then  the  loss  would  have  been  $1,500 
instead  of  $500.  If,  on  the  contrary,  he  had  withdrawn  $1,000 
during  the  period  the  result  would  have  been  a  profit  of  $500 
instead  of  a  loss  of  $500.  Thus  two  rules  may  be  framed  as 
follows : 

1.  To  the  profit  as  determined  by  a  comparison  of  capital 
at  two  different  dates,  add  withdrawals  and  deduct  newr 
capital. 

2.  To  the  loss  as  determined  by  a  comparison  of  capital  at 
two  different  dates,  add  new  capital  and  deduct  withdrawals. 

These  rules  may  be  proven  by  applying  the  second  one  to 
the  problem  being  discussed.  If  Dimlawn  had,  at  some  time 
after  beginning  business,  added  cash  amounting  to  $2,000  and. 

5 


Elementary  Accounting  Problems 

had  from  time  to  time  withdrawn  amounts  aggregating  $i,ooo, 
the  loss  for  the  three  months  would  have  been  $1,500,  arrived 
.at  as  follows: 

Loss,  as  shown  by  comparison  of  capital $500. 00 

Add — new  capital 2,000 . 03 

Total $2,500 .  00 

Deduct — withdrawals i  ,000 .  00 

Actual  loss $1 ,500 .  GO 

It  might  be  more  clearly  proven  by  such  a  tabulation : 

Capital — January  i,  1910 $2,500.00 

Add — new  capital 2,000. 00 

Total $4,500 .  00 

Deduct — withdrawals i  ,000 .  00 

Adjusted  capital $3,500 . 00 

Capital — March  31,  1910 2,000.00 

Loss $1 ,500 .  00 

There  follows,  a  problem  similar  to  the  present  problem, 
which  may  be  used  to  test  the  student's  grasp  of  the  principles 
embodied  in  the  above. 


Problem  Number  One 


PROBLEM    No.    lA 


A.  Howell  engaged  in  business  January  i,  19  lo,  with  a  capi- 
tal of  $10,000,  comprised  of  accounts  receivable  $8,000,  accounts 
payable  $4,000,  merchandise  $5,000,  cash  $1,000.  On  March  31, 
1910,  his  assets  and  liabilities  comprised  cash  $100,  accounts  pay- 
able $7,000,  notes  payable  $1,000,  furniture  and  fixtures  $800, 
merchandise  $12,000,  accounts  receivable  $8,000.  During  the 
three  months  he  had  added  $2,000  and  withdrawn  at  different 
times  $1,000,  $600,  and  $1,400. 

Prepare  a  comparative  statement  of  assets  and  Uabilities, 
showing  increases  and  decreases  of  the  various  items,  supple- 
mented by  a  tabulation  which  will  determine  the  profit  or  loss 
for  the  three  months  ended  March  31,  1910. 


Elementary  Accounting  Problems 

PROBLEM    No.    2 
Demonstration 

Mr.  Dimlawn,  upon  looking  over  the  statement  presented 
by  his  bookkeeper,  which  showed  a  loss  of  $500  for  the  three 
months  ended  March  31,  1910,  might  readily  be  imagined  as  re- 
marking, "  I  don't  understand  how  that  can  be."  To  his  book- 
keeper he  might  have  addressed  the  inquiry,  "  Mr.  Sherwood, 
how  do  you  account  for  the  loss  ?  " 

The  bookkeeper  presumably  would  be  unable  to  explain  it. 
The  statement  prepared  would  not  show,  with  any  degree  of  sat- 
isfaction, the  cause  of  the  loss.  The  ledger,  it  will  be  remem- 
bered, contained  less  information  than  the  statement.  Obviously 
it  would  be  useless  to  depend  upon  either  source  for  satisfactory 
information. 

Reasoning  as  a  layman,  Mr.  Dimlawn  would  unquestionably 
reach  the  conclusion  that  either  he  was  not  making  enough 
money  on  his  goods,  or  that  the  expense  of  running  his  store 
was  too  high.  But  how  could  he  tell,  when  not  even  the  amount 
of  his  merchandise  transactions  or  of  his  expenses  were  shown 
on  the  statement,  much  less  on  the  books  ?  Surely  this  informa- 
tion must  exist,  but  where?  Possibly  not  in  the  ledger  would 
the  data  be  found,  but  certainly  in  some  of  the  books. 

Consultation  with  the  bookkeeper  revealed  the  fact  that,  in 
addition  to  the  check  book,  which  Mr.  Dimlawn  already  knew 
about,  there  was  kept  a  blotter  or  journal  in  which  all  purchases 
on  account,  charge  sales,  returns  and  allowances,  etc.,  were  en- 
tered daily.  There  was  also  a  small  cash  book  where  the  re- 
ceipts and  disbursements  were  entered. 

As  a  result  of  the  proprietor's  investigation  the  bookkeeper 
was  directed  to  go  over  these  books  and  records  and  separate  all 
the  different  kinds  of  transactions.  He  began  with  the  blotter, 
and  after  a  careful  analysis  produced  the  following  results :  mer- 
chandise purchases,  $10,421.96;  merchandise  purchase  returns, 
$200;  merchandise  charge  sales,  $854.39;  merchandise  sales  re- 
turns and  allowances,  $127.52.  The  cash  book  showed  receipts 
from  cash  sales,  $2,432.47;  from  customers  on  charge  accounts, 
$564.13;  expenses  paid  in  cash,  $347.32.     The  check  book  dis- 

8 


Problem  Number  Two 

closed    deposits    of    $2,475.11,    and    expenses    paid    by    check, 
amounting  to  $52.68. 

Dimlawn,  bent  upon  finding  out  just  how  the  loss  of  the 
previous  three  months  had  occurred,  would  probably  have 
adopted  the  ordinary  lay  method  of  accomplishing  such  object 
and  set  down  the  figures  as  follows: 

I  have  sold: 

For  cash $2,432.47 

On  account 854-39 

$3,286.86 
Less  returns  and  allowances 127.52 

$3,159-34 
The  goods  sold  cost  me: 

Inventory,  January  i $2,300,00 

Purchases 10,421 .  96 

$12,721.96 
Less: 

Returns $200.00 

Inventory 9,262.62  9,462.62         3.259-34 

I  have  lost  on  the  goods $100.00 

In  addition  I  have  had  expenses: 

Paid  in  cash $347-32 

Paid  by  check 52.68  400.00 

My  total  loss  is $500.00 

The  fact  that  he  had  proven  or  accounted  for  the  loss  might 
have  been  a  source  of  great  satisfaction  to  the  proprietor.  Of 
far  greater  importance  should  have  been  the  disclosure  that 
there  was  a  loss  of  $100  on  the  sale  of  the  merchandise,  to  say 
nothing  of  the  expense  of  $400  incident  to  its  sale.  The  thing 
which  should  have  annoyed  him  was  the  fact  that  so  much  time 
and  trouble  had  been  consumed  in  getting  the  information.  Thus 
Mr.  Dimlawn,  although  not  a  bookkeeper,  might  easily  have  been 
self-convinced  of  the  inadequacy  of  his  books  and  the  necessity 
for  changes  in  his  merchandise  pricing. 

Upon  talking  matters  over  with  his  bookkeeper,  he  learned 
that  the  books  were  kept  by  single  entry,  which  accounted  for 
the  meager  information  they  afforded  as  to  the  transactions  of 
the  business  as  a  whole.  The  bookkeeper  informed  him  that 
double  entry  would  greatly   improve  matters,   and  that  books 

9 


Elementary  Accounting  Problems 

kept  by  that  method  would  yield  information,  not  only  as  to 
results  at  certain  times,  but  as  to  the  causes  underlying  the 
results. 

He  was  accordingly  instructed  by  the  proprietor  to  convert 
the  books  from  single  to  double  entry  as  of  March  31,  19 10,  and 
to  keep  them  on  such  basis  in  the  future. 

In  following  the  bookkeeper  through  such  process  it  is  to  be 
remembered  that  the  ledger  contained  only  accounts  with  cus- 
tomers, creditors,  and  the  proprietor.  For  all  practical  pur- 
poses here  the  customers  and  creditors  may  be  represented  by 
two  controlling  accounts,  amounting  respectively  to  $162.74  and 
$10,221.96.    The  balance  in  the  proprietor's  account  was  $2,000. 

The  first  step  would  probably  consist  in  making  an  entry  in 
the  blotter,  which  book,  assuming  it  to  be  suitably  ruled,  would 
in  the  future  constitute  the  journal. 

Such  an  entry  would  be  as  follows : 

Merchandise $9,262 .  62 

Cash  in  bank '. 2,572 .  43 

Cash  in  hand 224 .  17 

Accounts  receivable 162 .  74 

To  Accounts  Payable $10,221 .96 

R.  J.  Dimlawn,  Proprietor 2,000.00 

Obviously  such  accounts  as  accounts  receivable,  accounts 
payable,  and  proprietorship  already  appearing  on  the  ledger  need 
not  be  posted  from  the  journal.  The  remaining  items  having 
been  posted,  the  ledger  would  then  be  in  equilibrium. 

Regarding  the  conversion  from  single  to  double  entry,  one  or 
two  variations  from  the  case  in  question  should  be  mentioned. 
Single  entry  is  rarely  found  in  its  pure  state.  The  cases  are 
probably  few  in  which  the  proprietor's  account  is  found.  The 
cases  are  numerous  in  which  accounts  other  than  those  planned 
by  single  entry  appear.  Common  among  such  are  the  property 
accounts,  furniture  and  fixtures,  and  various  expense  accounts. 
Cash  is  even  introduced  at  times  and  the  books  made  to  operate 
on  a  hybrid  system  which  partakes  of  both  single  and  double 
entry. 

Where  such  variations  exist,  the  capital  must  be  established 
if  no  account  exists,  or  the  account  adjusted  if  such  steps  are 
indicated  by  the  conditions.  The  capital  will  be  determined  by 
gathering  together,  Hsting  and  placing  on  the  books  all  assets 

10 


Problem  Number  Two 

and  liabilities.  If  expense  accounts  are  found  they  may  be  in- 
cluded upon  the  debit  side  of  the  list  of  accounts,  and,  after  the 
capital  thus  established  has  been  placed  upon  the  books,  the  ex- 
pense accounts  may  be  closed  out  to  the  capital  account  by 
journal  entry,  thus  reducing  the  capital,  or  they  may  be  ignored 
in  the  establishment  of  the  capital  by  being  merely  ruled  off  in 
the  ledger,  provided  the  old  ledger  is  continued  in  use. 

Mr.  Dimlawn's  conversation  v^ith  the  bookkeeper  impressed 
upon  the  mind  of  the  latter  two  points.  The  first  one  was,  that 
his  books  must  show  causes  as  well  as  results;  the  second,  that 
these  causes  must  be  classified.  In  short,  he  realized  that  in  this 
particular  case  causes  were  divided  into  sales  of  merchandise 
and  expenses.  To  show  these  he  must  needs  introduce  accounts 
for  them  and  see  to  it  that  when  transactions  with  customers  and 
creditors  or  with  cash  occurred,  both  phases  of  the  transactions 
were  recorded.  In  the  instance  of  the  merchandise,  the  account 
already  existing  could  be  used  for  such  purpose. 

What  the  bookkeeper  planned  to  do  was  to  introduce  nominal 
accounts,  which  would  serve  the  temporary  purpose  of  record- 
ing, in  a  classified  manner,  the  changes  during  a  given  period  in 
the  real  accounts. 

With  the  change  from  single  to  double  entry  came  also  cer- 
tain improvements  in  the  books  used.  As  previously  mentioned, 
the  blotter  was  converted  into  a  journal.  The  purchases  and 
sales  were  withdrawn  from  the  journal  and  entered  respectively 
in  purchase  and  sales  journals.  The  original  cash  book  was  re- 
placed by  one  arranged  in  columnar  form  providing  on  the  left- 
hand  page  for  net  cash  receipts,  cash  discount  on  sales,  accounts 
receivable,  cash  sales,  and  sundries,  while  the  right-hand  page 
provided  for  net  cash  disbursements,  cash  discount  on  purchases, 
accounts  payable,  and  sundries. 

During  the  month  of  April,  Mr.  Dimlawn  had  changed  his 
policy  in  several  respects;  one  was  to  give  more  attention  to  the 
display  of  goods,  another  was  to  advertise.  He  also  instituted 
the  practice  of  providing  chairs  for  his  patrons.  He  purchased 
the  desk  and  chair  for  his  bookkeeper  which  he  had  had  on 
approval. 

The  transactions  for  the  month  were  as  follows:  cash  sales, 
$954.32;  charge  sales,  $318.11;  merchandise  purchases,  $1,- 
427.83;  trade  discount  on  purchases,  $56.22;   purchase   allow- 

II 


Elementary  Accounting  Problems 

ances,  $57.58;  inward  freight,  $72.37;  sales  returns,  $26.43; 
chairs  purchased  on  account,  $65;  display  fixtures  ($237.50) 
and  office  furniture  ($47.50)  purchased  on  account.  'There  was 
received  from  customers  on  accounts  receivable,  $398.37.  All 
cash  receipts  were  deposited  in  the  bank.  From  time  to  time 
during  the  month,  $250  was  transferred  from  the  bank  to  the 
petty  cash.  The  bills  for  rent,  amounting  to  $75;  light,  $15.80; 
advertising,  $135,  were  paid  by  check,  and  other  checks  aggre- 
gating $3,174.26  were  drawn  in  settlement  of  sundry  accounts 
payable.  The  following  disbursements  were  made  out  of  petty 
cash:  salaries,  saleswomen,  $200;  janitor  and  porter,  $40;  book- 
keeper and  cashier,  $60;  office  expenses,  $12.50;  stationery  and 
printing,  $8.75 ;  wrapping  paper,  etc.,  $20 ;  messenger,  delivering 
goods,  $15;  commission  to  saleswomen,  $42.30.  The  inventory, 
April  30,  1910,  was  $9,745.94. 

From  the  opening  balances  at  the  beginning  of  the  month, 
supplemented  by  the  April  transactions,  we  are  instructed  to 
prepare  a  working  sheet  which  will  show  all  the  transactions  as 
they  would  appear  on  the  ledger  and  prepare  therefrom  a  bal- 
ance sheet  at  April  30,  1910,  and  a  profit  and  loss  account  for  the 
month  ended  on  the  same  date,  setting  forth  the  profit  on  mer- 
chandise and  the  expense  separately. 

Since  the  books  of  R.  J.  Dimlawn  are  now  on  a  double  entry 
basis,  and  the  principle  underlying  double  entry  is  equilibrium, 
the  transactions  above  given  should  permit  of  expression  in  the 
form  of  journal  entry.  In  order  that  no  complementary  trans- 
actions may  be  overlooked,  it  seems  desirable  that  the  trans- 
actions which  affect  the  opening  balances  be  so  treated. 

The  journal  entries  covering  the  transactions  for  the  month 
of  April,  1910,  together  with  those  necessary  to  close  the  books, 
are  as  follows: 

Cash  in  bank $954-32 

Accounts  Receivable 318. 11 

Accounts  Payable 1 13 .  80 

(Mdse.  discount  on  purchases $56.22) 

(Purchase  allowances 57  •  5^) 

To  Merchandise $1,386.23 

Merchandise $1,541 .63 

To  Accounts  Payable 1,500. 20 

(Purchases $1,427  •  83) 

(Inward  freight 72-37) 

12 


Problem  Number  Two 


To  Accounts  Receivable  (sales  returns 

Petty  Cash  (messenger) 

Cash  in  bank 398.37 

To  Accounts  Receivable 

Furniture  and  fixtures 350.00 

To  Accounts  Payable 

(Chairs $65,00) 

(Display  fixtures 237.50) 

(Office  furniture 47.50) 

$350-00 

Petty  Cash 250.00 

To  Cash  in  bank 

Expense 609.35 

To  Cash  in  bank 

Petty  cash 

Rent $75.00 

Light 15.80 

Advertising 135.00 

Salaries — saleswomen 200.00 

Janitor 40.00 

Bookkeeper  60.00 

Office  expense 12.50 

Stationery  and  printing 8.75 

Wrapping  paper 20.00 

Commission    42.30 

$609.35 

Accounts  Payable 3,174.26 

To  Cash  in  bank 

Merchandise — Inventory   (new) 9,745.94 

To  Merchandise 

Merchandise    Z27-92, 

To  Profit  and  Loss 

To  close  the  merchandise  account. 

R.  J.  Dimlawn,  Proprietor 281.43 

To  Profit  and  Loss 

To  transfer  net  loss  for  the  month. 


26.43 
15.00 


398.37 


350.00 


250.00 


225.80 
383.55 


3,174-26 


9,745.94 


327.92 


281.43 


It  will  be  noted  that  the  above  entries  summarize  the  trans- 
actions for  the  month,  and,  when  taken  in  connection  with  the 
trial  balance  of  the  ledger  at  the  time  it  was  put  upon  a  double 
entry  basis,  show  a  complete  reflection  in  totals  of  the  books. 

The  value  of  the  following  working  sheet  to  the  accountant,  as 
well  as  the  student  who  strives  to  solve  problems,  will  doubtless  be 


13 


Elementary  Accounting  Problems 

evident  after  a  study  of  it  has  been  made.  It  is  not  intended  to 
be  a  three-column  balance  sheet,  or  anything  of  the  sort.  It  is 
intended  to  give  a  picture  of  the  ledger  and  afford  an  opportunity 
for  adjustments  and  the  proving  of  figures  before  attempting  to 
prepare  financial  statements.  In  the  following  illustration  it  ap- 
pears in  its  simplest  form. 

WORKING  SHEET-BOOKS  OF  R.  J.  DIMLAWN 
April,  1910 


Trialbalance. 
April  I,  1910 

Adjustments 

Balance 

Sheet, 

April  30, 

1910 

Profit  & 
Loss  for 

the 
month  of 

Debit 

Credit 

April, 
1910 

Merchandise 

Cash  in  bank . 
Petty  cash 

$9,262 .  62 

2,572-43 
224.17 
162.74 

($1,541.63 
i       327-92 

5    954-32 
(    398.37 

250.00 
318. II 

350.00 

609.35 

9.745-94 

(     113-80 
(  3.174-26 

281.43 

$1,386.23 

9.745-94 
(     250.00 
<     225.80 
(3.174-26 
j       1500 
i     383-55 

5     26.43 
i    398.37 

1,500.20 
350.00 

(    327-92 

I    281.43 

$275.06 

75.62 
56.05 

350.00 

9.745-94 

Accounts  Receivable. . 

Total 

$12,221.96 

New  Accounts 
Furniture  and  fixtures. 
Expense 

1 
$10,221.96 

2,000.00 

$609.35 

Mdse. — Inventory. . . . 

Credits 

$10,502.67 

$609.35 

Accounts  Payable 

R.  J.  Dimlawn,  Prop. . 

$8,784.10 
1,718.57 

Total 

$12,221.96 

New  Accounts 
Profit  and  Loss 

$327-92 
2S1.43 

$18,065.13 

$18,065.13 

$10,502.67 

$609.35 

From  the  working  sheet,  the  financial  statements  may  now  be 
prepared  by  taking  the  items  from  the  last  two  columns.  To  be 
understood,  the  working  sheet  should  be  studied  and  the  figures 
followed  through  step  by  step.  A  few  minutes  of  study  on  this 
form  will  produce  more  satisfactory  results  than  voluminous  ex- 
planations.   The  financial  statements  follow. 

14 


Problem  Number  Two 


R.  J.  DIMLAWN 
Balance  Sheet — ^April  30,  19 10 


Assets 

Liabilities  and  Capital 

Furniture  and  fixtures .  . 
Merchandise  inventory . 
Cash 

$350.00 

•      9-745-94 
350.68 

Accounts  Payable $8,784. 10 

Proprietorship 1,718.57 

Accounts  Receivable. . . . 

56.05 
.  $10,502.67 

Total  Liabilities  and 

Total  Assets 

Capital $10,502.67 

R.   J.   DIMLAWN 
Profit  and  Loss  Account — Month  of  April,  1910 


Expenses $609.35 


$609.35 


Gross  profit  on  sales  of 

merchandise $327 .  92 

Balance — Net  loss  trans- 
ferred to  proprietor's 
account 281.43 

$609.35 


R.   J.   DIMLAV7N,   Proprietor 


1910 

April  30     Loss  for  month       $281 .43 

Balance 1.718.57 

$2,000.00 


1910 


March  31     Balance $2,000 .  00 


$2,000.00 


15 


Elementary  Acco\mting  Problems 


PROBLEM    No.    2A 

From  the  following  items,  prepare  an  entry  which  would 
convert  the  books  of  A.  Howell  from  a  single  to  a  double  entry 
basis,  at  March  31,  1910:  cash,  $100;  accounts  payable,  $7,000; 
notes  payable,  $1,000;  furniture  and  fixtures,  $800;  merchandise, 
$I2,0G0;  accounts  receivable,  $8,000;  expenses,  $750. 


16 


Problem  Number  Three 

PROBLEM  No.  3 
Demonstration 

Mr.  Dimlaw's  capital  account  at  the  end  of  April  was 
$281.43  smaller  than  at  the  beginning.  Evidently  he  had  lost 
money  during  the  month.  This  fact  was  borne  out  by  the  profit 
and  loss  account,  which  summary  showed  that,  while  the  gross 
profit  on  merchandise  had  been  $327.92,  the  expense  of  con- 
ducting the  business  had  been  $609.35,  resulting  in  a  net  loss  of 
$281.43. 

The  result  was  not  inspiring.  Losses  meant  diminished  cap- 
ital. A  continuation  would  result  in  bankruptcy.  To  avoid  bank- 
ruptcy some  remedy  must  be  applied.  Before  any  remedy  could 
be  applied  the  cause  must  be  known.  Thus  the  proprietor  may 
have  reasoned. 

Mentally  he  may  have  inquired:  **Are  my  expenses  higher 
than  the  business  will  justify,  or  am  I  not  making  a  sufficiently 
large  gross  profit  to  cover  the  expenses  which  are  warranted  by 
the  volume  of  business?  Will  this  profit  and  loss  account  which 
I  have  before  me,  give  me  this  information  ?  Will  it  help  me  to 
remedy  the  cause  of  the  trouble?  Will  it  help  me  to  administer 
my  business  so  that  I  shall  make  instead  of  lose  money  next 
month  ?" 

Concluding  that  it  would  not,  he  may  be  imagined  to  have 
called  his  bookkeeper  and  asked  for  the  ledger  which  showed  the 
following  accounts : 


Merchandise 


Expense 


3/31/ 10,    In- 

ventory  ...  $9,262.62 
Purchases  ...  1,427.83 
Inward  freight  72.37 
Sales  returns  26.43 
Messenger...  15.00 
P.  &  L 327-92 


$11,132.17 


4/30/ fo.    In- 
ventory   ...  $9,745.94 


Sales  

Allowances. 
Discount  .. 
Inventory.. 


M.272.4 
57-5^ 
56.22 

9»745-^ 


$11,132.17 


Rent  $75-oc 

Light  15.8c 

Advertising    135.00 

Salaries,  Salesmen 200.00 

Janitor 40.00 

Bookkeeper    60.0c 

Office    expense 12.50 

Stationery  and  printing  8.75 

Wrapping   paper 20.00 

Commission  42.30 


$609.35 


P  &  L  $605.33 


$609.35 


Elementary  Accounting  Problems 

From  these  accounts  he  may  have  determined  the  following: 

Ratio  of  gross  profit  to  cost 3631  + 

Ratio  of  expense  to  cost 6747  + 

Resulting  in  a  loss  of ,      31164- 

Which  applied  to  the  cost  of  $903.08  shows  the  loss  of  $281.43 

In  order  to  make  a  profit  in  May,  Dimlawn  concluded  that 
he  must  purchase  more  cheaply,  increase  his  volume  of  business, 
reduce  expenses,  or  add  to  the  cost  of  all  his  goods  a  percentage 
greater  than  67.47%. 

Having  in  mind  the  reforms  necessary,  and  the  service  which 
the  merchandise  and  expense  accounts  have  rendered  him  in  de- 
termining what  to  do,  he  instructs  his  bookkeeper  to  arrange  to 
furnish  him  at  the  close  of  May  with  a  statement  which  will  em- 
brace the  information  shown  by  these  accounts. 

In  accordance  with  this  request  the  bookkeeper  arranges  to 
open  accounts  for  the  various  classes  of  expenses  and,  foreseeing 
that  at  some  time  the  entries  in  the  merchandise  account  may 
become  numerous,  or  that  his  employer  may  call  upon  him  for 
statements  extending  back  over  a  greater  period  than  a  month, 
abandons  the  merchandise  account,  setting  up  in  place  thereof 
accounts  which  will  properly  classify  the  elements  of  which  it 
is  composed. 

The  transactions  for  May  included  the  following:  credits  to 
accounts  payable,  aggregating  $3,839.66  distributed  as  follows; 
merchandise  purchases  $2,559.05 ;  inward  freight  $45.77 ;  inward 
cartage  $12;  automobile  $1,200;  auto-expense  (gasoline)  $22.84. 

The  cash  sales  for  the  month  were  $3,920.31 ;  charge  sales 
$218.47.  The  sales  returns  amounting  to  $164.53  composed 
of  $151.47  involving  the  petty  cash  and  $13.06  credited  to  cus- 
tomers' accounts. 

The  petty  cash  disbursements  were:  wages  of  chauffeur  $50; 
wages  of  messenger  delivering  goods  $15 ;  wages  of  saleswomen 
$204.50;  wages  of  janitor  $40;  salary  of  bookkeeper  $60;  office 
expense  $18.50;  commission  to  saleswomen  $144.85;  drawings, 
R.  J.  Dimlawn  $75. 

Among  the  disbursements  by  check  were  the  following:  rent 
$75;  light  $14.72;  advertising  $150.25;  stationery  and  printing 
$12.50;  packing  supplies  $65 ;  insurance  (one  year  from  May  ist) 
$60;  transferred  to  petty  cash  $900. 

18 


Problem  Number  Three 

The  trade  discount  on  purchases  amounted  to  $88.15;  pur- 
chase allowances  $137.49;  sales  allowances  applicable  to  charge 
sales  $7.82.  Other  transactions  comprised  insuring  the  stock  of 
merchandise  and  borrowing  $10,000  from  the  Cedar  Trust  Com- 
pany on  a  three  months'  note  bearing  interest  at  6%  and  dated 
May  5th. 

The  bookkeeper  opened  an  account  which  he  called  "auto-ex- 
pense" and  to  which  he  charged  the  wages  of  the  chauffeur  and 
the  gasoline  purchased.  There  was  not  enough  gasoline  on  hand 
at  the  end  of  the  month  to  warrant  taking  cognizance  of  it  in 
the  inventory.  It  was  estimated  that  the  automobile  service  was 
devoted  to  the  delivery  of  goods  and  the  hauling  of  incoming 
goods  respectively  in  the  proportions  of  three-fourths  and  one- 
fourth. 

The  inventory  of  merchandise  on  May  31st  was  $9,854.32. 
The  balance  of  the  accounts  receivable  was  $47.25,  while  that  of 
accounts  payable  was  $1,970.43.  The  interest  accrued  on  notes 
payable  was  $44.37.  The  interest  on  bank  balances  was  $8.65. 
In  order  to  be  exact  the  bookkeeper  accrued  the  wages  of  sales- 
women, for  the  two  days  intervening  between  the  end  of  the  week 
and  the  end  of  the  month.  The  amount  involved  was  $17. 
There  was  also  due  saleswomen  for  commission  during  the  two 
days  $20.17.  The  bookkeeper  was  instructed  to  depreciate  the 
furniture  and  fixtures  at  the  rate  of  $10  per  month  and  the  auto- 
mobile on  the  basis  of  a  five  year  life. 

From  the  above  facts  taken  in  conjunction  with  the  balance 
sheet  of  April  30th  prepare ; 

(a)  Working  sheet    (adjustment  columns   supported  by 

journal  entries). 
{h)  Trading  and  profit  and  loss  account  for  the  month 

ended  May  31,  1910. 
■(c)  Balance  sheet — May  31,  1910. 


Solution  to  Problem  No.  3 

The  purpose  of  the  working  sheet  it  will  be  remembered  is 
to  show  a  picture  of  the  books;  to  provide  for  proof  of  mathe- 
matical accuracy  as  the  work  progresses ;  to  facilitate  the  prep- 
aration of  the  financial  statements.     It  is  of  as  much  practical 

19 


Elementary  Accounting  Problems 

help  to  the  accountant  as  to  the  student  who  undertakes  the  solu- 
tion of  problems.  How  often  does  it  happen  that  the  accountant 
prepares  the  statements  contained  in  his  report  from  the  trial 
balance  without  adjusting  any  figures?  Seldom!  How  often 
<ioes  the  accountant  have  to  make  so  many  adjusting  entries 
for  the  purpose  of  his  report  that  if  he  is  not  careful  and  sys- 
tematic in  his  work  he  may  be  greatly  confused  and  embarrassed 
when  called  upon,  sometimes  months  afterwards,  to  explain  cer- 
tain differences  between  the  books  and  his  report?  Frequently! 
Would  it  not  be  better,  then,  to  have  a  working  sheet  which 
shows  the  figures  per  the  books,  all  adjustments,  with  journal 
entries  supporting  them,  and  tracing  the  connection  between  the 
books  and  the  report  ?    Decidedly ! 

When  a  student  undertakes  the  solution  of  a  problem  wherein 
do  the  pit-falls  lie  ?  They  lie  in  failing  to  start  with  the  accounts 
in  balance;  failing  properly  to  interpret  some  statement  of  facts 
entailing  an  adjustment;  failing  to  credit  some  account  at  the 
5ame  time  a  certain  account  is  debited,  or  vice  versa ;  failing  cor- 
rectly to  apply  the  adjusting  items;  failing  properly  to  classify 
the  accounts;  failing  to  foot  correctly.  A  student  who  finishes 
a  problem  and  finds  that  his  solution  is  wrong  wants  to  know 
where  the  trouble  is.  If  he  is  working  in  an  examination  he 
wants  to  know  quickly.  The  working  sheet  enables  him  to 
localize  his  error.  It  enables  him  to  do  so  quickly.  The  figures 
are  all  before  him  and  not  scattered  about  on  scraps  of  paper. 
A  systematic  review  of  the  work  will  discover  the  error  very 
promptly.    This  review  will  consist  of  the  following  steps : 

1.  Re-foot  trial  balance. 

2.  Foot  adjustment  columns  if  same  has  not  been  done; 

re- foot  if  previously  footed. 

3.  Check  application  of  adjusting  entries  and  distribution 

into  balance  sheet  and  profit  and  loss  statement  col- 
umns. 

4.  Re-foot  balance  sheet  and  profit  and  loss  columns. 

There  is  some  question  as  to  whether  it  takes  longer  to  solve 
a  problem  with  or  without  the  working  sheet.  Without  paus- 
ing to  give  due  consideration  to  the  question  we  should  probably 

20 


Problem  Number  Three 

say  that  the  working  sheet  undoubtedly  takes  longer.  Wheit 
you  consider  the  amount  of  time  lost  in  hunting  for  errors  it  is 
probable  that  the  method  which  seems  at  first  the  longer  is  after 
all  the  shorter.  There  is  now  (1912)  being  conducted  by  the 
accounting  department  of  the  New  York  University,  School  of 
Commerce,  Accounts  and  Finance,  a  series  of  experiments  to 
determine  the  relative  merits  of  the  two  methods  so  far  as 
their  effect  upon  speed  is  concerned. 

The  solution  of  the  present  problem  is  not  dependent  upon 
speed.  The  procedure  may  therefore  include  the  use  of  the  work- 
ing sheet.  The  actual  task  of  setting  it  up  may  be  deferred  until 
such  time  as  the  journal  entries  which  play  so  important  a  part 
in  the  solution  have  been  made. 

It  may  be  advisable  before  journalizing  the  transactions  for 
the  month  to  explain  what  is  meant  by  "framing  journal  en- 
tries." Students  frequently  express  surprise  when  in  so  doing 
cash  is  included  in  an  entry.  Invariably  the  act  will  be  objected 
to  by  the  student  with  the  statement  that  "cash  does  not  go  into 
journal."  As  regards  bookkeeping  of  course  he  is  correct.  As 
regards  the  solution  of  a  problem  little  cognizance  is  taken  of 
books  and  the  framing  of  journal  entries  in  reality  means  ex- 
pressing the  financial  transactions  of  whatever  nature  in  tha 
form  of  a  journal  entry.  ^ 

Framing  journal  entries  is  an  accomplishment  much  to  be* 
sought  by  the  student.  It  has  frequently  been  said  that  the  ac- 
countant who  can  analyze  a  complicated  series  of  financial  trans- 
actions and  express  them  in  the  form  of  journal  entries  need', 
never  worry  about  succeeding  in  his  work.  To  be  able  to  frame; 
the  journal  entries  is  to  do  more  than  half  of  the  hard  work  iir 
most  problems.  Failure  to  understand  and  apply  them  usually 
means  failure  in  the  solution.  Familiarity  with  them  is  accom- 
panied by  that  comfortable  feeling  of  being  at  ease  which  takes 
the  sting  and  dread  out  of  practical  problems. 

The  journal  entries,  which  seem  to  be  sufficiently  expressive 
without  explanation,  covering  the  transactions  for  May,  follow:. 

Purchases $2,559.05 

Inward  freight 45-77 

Inward  cartage 12.00 

Automobile - 1,200.00 

Auto  expense  (gasoline) 22.84 

To  accounts  payable $3,839.66* 

21 


Elementary  Accounting  Problems 

Cash  in  bank 3,920.31 

Accounts    receivable 218.47 

To   sales 4,138.78 

Sales  returns 164.53 

To  Petty  cash. . .' I5I-47 

Accounts  receivable 13.06 

Auto  expense  (wages  of  chauffeur) 50.00 

Delivery  expense  (wages  of  messenger) 15.00 

Wages  of  saleswomen 204.50 

Wages  of  janitor 40.00 

Salary  of  bookkeeper 60.00 

Office  expense 18.50 

Commissions  to  saleswomen 144-85 

Drawings,  R.  J.  Dimlawn 75.oo 

To  petty  cash 607.85 

Rent 75  00 

Light 1472 

Advertising 150.25 

Stationery  and  printing 12.50 

Packing  supplies 65.00 

Insurance  paid  in  advance 60.00 

Petty  cash  (transfers) 900.00 

To  cash  in  bank 1,277.47 

Accounts  payable 225.64 

To  Trade  discount  on  purchases 88.15 

Purchase  allowances 137-49 

Sales  allowances 7.82 

To  accounts  receivable 7.82 

Cash  in  bank 10,000.00 

To  notes  payable 10,000.00 

Delivery  expense 5463 

Inward  cartage 18.21 

To  auto  expense 72.84 

Inventory  (new) 9,854.32 

To  inventory  (old) 9,854.32 

Accounts  receivable  (new) 47-25 

To  accounts  receivable  (old) 47-25 

Accounts  payable  (old) 1,970.43 

To  accounts  payable  (new) 1,970.43 

•  Interest  on  notes  payable 44-37 

To  interest  accrued  on  notes  payable 44-37 

Cash  in  bank 8.65 

To  interest  on  bank  balance 8.65 

Wages  of  saleswomen 17.00 

To  wages  accrued 17.00 

Commissions  to_  saleswomen 20.17 

.    To  commissions  accrued 20.17 

Provision  for  depreciation  of  furniture  and  fixtures.  10.00 

To  reserve  for  depreciation  of  furniture  and  fix- 
tures   10.00 

Provision  for  depreciation  of  automobile. 20.00 

To  reserve  for  depreciation  of  automobile 20.00 

Insurance  5-00 

To  insurance  paid  in  advance 5.00 

Cash  in  bank 206.39 

To  accounts  receivable 206.39 

Accounts  payable 10,427.69 

To  cash  in  bank 10,427.69 

Profit  and  loss 702.58 

To  R.  J.  Dimlawn,  proprietor 702.58 

22 


Problem  Number  Three 


The  two  entries  next  preceding  the  last  require  some  explana- 
tion. Those  referred  to  reflect  the  amounts  received  from  cus- 
tomers and  paid  to  creditors  respectively.  Ostensibly  the  entries 
showing  the  transactions  for  the  month  covered  all  the  transac- 
tions. In  reality  some  were  omitted.  The  wording  was  de- 
ceptive and  at  the  same  time  truthful.  This  illustrates  what  is 
known  as  a  "catch"  in  problems.  The  statement  was  made  that 
"the  transactions  for  May  included  the  following."  This  is 
quite  different  for  example  from  the  statement  "the  transactions 
were  as  follows."  This  illustration  shows  how  carefully  a  prob- 
lem must  be  read  and  how  the  student  must  ever  be  upon  the 
alert. 

This  feature  also  serves  to  bring  out  the  application  of  the 
principles  which  are  involved  in  finding  the  "missing  cash  ac- 
count" or  the  cash  balance.  It  amounts  to  arriving  at  conclusions 
by  deduction.  It  is  a  valuable  expedient  often  in  solving  prob- 
lems but  it  is  a  dangerous  one  in  practice. 

The  amounts  are  determined  by  building  up  skeleton  ledger 
accounts  for  the  accounts  receivable  and  accounts  payable.  All 
known  amounts  are  entered  on  the  respective  sides  including  the 
balances  carried  down.  The  difference  in  the  account  which  re- 
sults is  attributed  to  cash  received  from  customers  or  paid  to 
creditors  depending  upon  the  account  and  so  treated.  The  ap- 
plication may  be  seen  in  the  ledger  accounts  which  appear  below : 
Accounts  Receivable 


Balance,  5/1/10 

Sales  

....       $56.05 
....       218.47 

Sales  returns 

Sales  allowances 

Balance,  5/31/10 

Cash 

. . .       $13.06 

7.82 

47.25 

$68.13 
206.39 

Balance,  6/1 /lo 

$274-52 
....       $47-25 

$274.52 

Accounts  Payable 


Trade  discount 

Purchase  allowances. 
Balance,  5/31/10 


$88.15 

137-49 

1,970.43 


Cash 


$2,196.07 
10,427.69 


^12,623.76 


Balance,  5/1/10. 
Purchases,  etc. . 


^,784.10 
3,839.66 


Balance,  6/1 /ro. 


$12,623.76 
•  $i>970.43 


23 


Elementary  Accounting  Problems 

The  working  sheet  may  now  be  prepared,  the  journal  en- 
tries posted,  and  the  adjustments  and  extensions  made. 

WORKING  SHEETS— BOOKS  OF  R.  J.  DIMLAWN 
May,  1910 


Trial 

Adjustments 

Balance 

Profit  & 

Debits 

Balance, 
April  30, 

Sheet, 
May  31, 

Loss 

Month  of 

1910 

Dr. 

Cr. 

1910 

■May,  1910 

Furniture    and 

fixtures  

$350.00 

$350.00 

Merchandise — 

inventory 

9,745-94 

r$3,920.3i 

$9,854.32 
1,277.47  1 

$*(io8.38) 

Cash  in  bank. .. 

275-06 

J  10,000.00 

1     1^^ 

I     206.39 

10,427.69  L 

2,705.25 

Petty  cash 

75-62 

900.00 

S  151.471 
1  607.855 

216.30 

Accounts  receiv- 

r 13.06] 
J      7-82  1 
1  206.39  1 

able  

56.05 

218.47 

L  47.25  J 

Purchases   

2,559-05 

2,559-OS 

Inward  freight. . 

45-77 

45.77 

Inward  cartage. 

J        12.00  ] 

1        18.21  j 

1,200.00 

30.21 

Automobile 

1,200.00 

Auto  expense. . 

1        So.oo ) 
1        22.84  j 

72.84 

Sales  returns. . . 

^      164.53  ^ 

164.53 

Delivery      ex- 

\       15.00  \ 

69.63 

pense  

\        54-63 1 

Wages  of  sales- 

\     204.50 ) 

221.50 

women   

I        17.003 

Wages  of  janitor 

40.00 

40.00 

Salary  of  book- 

keeper   

60.00 

60.00 

Office  expence.. 

18.50 

18.50 

Commissions  to 

\      144.85  \ 
\        20.173 

165.02 

saleswomen.. . 

Drawings,  R.  J. 

Dimlawn  

75.00 

t75.oo 

Rent 

75.00 

14.72 

150.25 

75-00 

14.72 

150.25 

Light  

Advertising 

Stationery  and 

printing 

12.50 

12.50 

Packing  supplies 

65.00 

65.00 

Insurance     paid 

in  advance. . . . 

60.00 

5.00 

55.00 

Sales  allowances 

7.82 

7.82 

*  Credit.    tOffset  to  proprietorship. 


24 


Problem  Number  Three 


Trial 

Adjustments 

Balance 

Profit  & 

Debits 

Balance, 
April  30, 

Sheet, 
May  31, 

Loss 

Month  of 

1910 

Dr. 

Cr. 

1910 

May,  1910 

Interest    on 

notes  payable. 

44-37 

44.37 

Provision     for 

depr.  of  furni- 

ture  and    fix- 

tures    

10.00 

10.00 

Provision     for 

depr.  auto. . . . 

20.00 

20.00 

Mdse  —  inven- 

tory (new) . . . 

9,854-32 

9,854.32 

Accounts  receiv- 

able (new) 

47.25 

47-25 

Insurance  

500 

S-00 

Profit  and  loss.. 

702.58 

702.58 

Total 

$10,502.67 

$14,503.12 

$4,373-07 

Credits 

Accounts     pay- 
able   

$8,784.10 

225.64] 
■     1,970.43  \ 
[10,427.69] 

3,839.66 

R.  J.   Dimlawn, 

proprietor    . . . 

1,718.57 

702.58 

$2,421.15 

Sales  

4,138.78 

$4,138.78 

Trade    discount 

on  purchases. 

88.15 

88.15 

Purchase  allow- 

ances   

137-49 

137.49 

Notes  payable. . 

10,000.00 

10,000.00 

Accounts     pay- 

able (new) 

1,970.43 

1,970.43 

Int.  accrued  on 

notes  pa3^able. 

44-37 

44-37 

Int.    on    bank 

balance 

8.65 

8.65 

Wages  accrued. 

17-00 

17.00 

Commissions  ac- 

crued   

20.17 

20.17 

Reserve    for 

depr.  F.  &  F. 

10.00 

10.00 

Reserve    for 

depr.  auto 

20.00 

20.00 

Total  

$10,502.67 

$43,688.44 

$43,668.44 

$14,503.12 

$4,373-07 

The  above  working  sheet  does  not  shov^  a  scientific  arrange- 
ment of  the  accounts  for  the  reason  that  it  has  been  built  up 
from  the  journal  entries.  With  one  or  two  exceptions  it  has 
been  constructed  in  the  exact  order  in  which  the  entries  appear. 
A  scientific  arrangement  would  show  the  accounts  in  the  order 

25 


Elementary  Accounting  Problems 

in  which  they  would  appear  in  the  respective  statements.  The 
working  sheet  herewith  has  the  advantage  from  the  point  of  view 
of  instruction  of  affording  an  opportunity  for  study  in  arranging 
the  accounts  in  the  statements.  The  accounts  are  classified  with 
regard  to  the  statements.  They  are  proven  mathematically  and 
lead  to  the  preparation  of  the  trading  and  profit  and  loss  account 
and  the  balance  sheet  which  are  now  presented. 

R.  J.  DIMLAWN 

Trading  and  Profit  and  Loss  Account  for  the  Month  Ended 
May  31,  1910 


DR. 


Trading  Section 


CR. 


Inventory,  Apr.  30,  1910.  $9,745-94 

Purchase    2,559.05 

Inward  freight 4577 

Inward   cartage 30.21 

Sales  returns 164.53 

Sales  allowances 7-82 

Delivery   expense 69.63 

Wages  of  saleswomen 221.50 

Commissions     to     sales- 
women    165.02 

Advertising 150.25 

Packing  supplies 65.00 

Balance     carried     down, 

being  gross  profit 994.02 


$14,218.74 


Sales $4,138.78 

Trade    discount    on    pur- 
chases    88.15 

Purchase  allowances 137.49 

Inventory,  May  31,  1910..     9,854.32 


$14,218.74 


DR. 


Profit  and  Loss  Section 


CR. 


Salary  of  bookkeeper. . . .  $60.00 

Office  expense 18.50 

Stationery  and  printing. .  12.50 

Rent 7500 

Light 1472 

Wages  of  janitor 40.00 

Insurance  S.oo 

Interest  on  notes  payable  44-37 

Provision  for  depr.  F.  &  F.  10.00 

Provision  for  depr.  auto.  20.00 
Balance      carried     down, 

being  net  profit 702.58 

$1,002.67 


Balance    brought    down, 

being  gross  profit $994.02 

Interest  on  bank  balance.  8.65 


$1,002.67 


26 


DR. 


Problem  Number  Three 
Proprietorship 


CR. 


Drawings $75-00 

Balance,       proprieorship, 

May  31,  1910 2,346.15 


$2,421.15 


Balance    brought    down, 

being  net  profit $702.58 

Balance,     proprietorship, 

April  30,  1910 1,718.57 


$2,421.15 


R.  J.   DIMLAWN 
Balance  Sheet,  May  31,  1910 


Assets 


Insurance  paid  in  advance  5S.oo 

Automobile 1,200.00 

Merchandise — inventory..  9,854.32 

Cash 2,921.5s 

Accounts  receivable 47-25 

Insurance  par  in  advance  SS-OO 


Total  assets $14,428.12 


Liabilities  and  Capital 


Notes  payable $10,000.00 

Accounts  payable 1,970.43 

Wages  accrued 17.00 

Commissions  accrued 20.17 

Interest  accrued  on  notes 

payable 44.37 

Reserves : 

For  depr.  of  fur- 
niture and  fix- 
tures    $10.00 

For  depr.  of  auto      20.00         30.00 
Proprietorship $2,346.15 

Total    liabilities    and 
capital $14,428.12 


27 


Elementary  Accounting  Problems 

Problem  No.  3A  (Practice) 

The  following  is  a  trial  balance  of  the  general  ledger  of  Peter 
Millard  for  the  year  ended  December  31,  191 1,  before  closing. 


Debits 


Land  and  buildings 

Furniture  and  fixtures.. 
Cash            

$80,000.00 
1,500.00 
2,465.00 

Accounts  receivable 

Notes  receivable 

Mdse — inventory,  Jan.  i, 

IQII 

12,000.00 
5,000.00 

18,000.00 

Purchases 

20,000.00 

Sales  returns . . . 

Salesmen's  commissions 

Advertising 

Heat  and  light 

100.00 

2,500.00 

1,000.00 

50.00 

75.00 

25.00 

2,500.00 

144.00 

1,350.00 

1500 

Office  salaries 

Office  expenses 

Salary— Peter   Millard. . 
Insurance  

Taxes    

Interest    on    notes    pay- 
able   

Credits 

Capital $106,329.00 

Accounts  payable 7,500.00 

Notes  payable 3,000.00 

Reserve  for  deprecia- 
tion: 

Buildings  2,000.00 

Furniture  and  fixtures  7500 

Drawing  account,  P. 

Millard  50.00 

Sales   25,000.00 

Trade  discount  on  pur- 
chases    500.00 

Interest  on  notes  receiv- 
able     250.00 

Interest  on  bank  balance  20.00 

Rent — income  2,000.00 


Total $146,724.00 


Total $146,724.00 


The  inventory  of  merchandise  at  December  31,  191 1,  was  val- 
ued at  $22,475.  The  insurance  unexpired  was  $44.  There  were 
invoices  for  purchases  amounting  to  $350  not  on  the  books 
although  the  goods  were  received  prior  to  December  31st.  The 
light  bill  for  December  amounting  to  $12  is  not  included  in  the 
above.  There  is  also  an  item  of  $10  for  interest  on  a  cus- 
tomer's account  to  be  considered. 

Prepare : 

(a)  Trading  and  profit  and  loss  account  for  the  year 

ended  December  31,  191 1. 

(b)  Balance  sheet — Decmber  31,  191 1. 


28 


Problem  Number  Four 

PROBLEM  No.  4 
Demonstration 

The  objection  on  the  part  of  the  business  man  to  the  trading 
and  profit  and  loss  account  is  that  he  does  not  understand  it. 
The  word  "account"  is  used  here  in  its  full  significance.  Any- 
thing resembling  an  account,  with  balances  carried  down  from 
one  side  to  another,  suggests  "bookkeeping"  to  the  business  man. 
He  insists  that  he  does  not  understand  bookkeeping;  therefore, 
he  does  not  understand  a  statement  in  the  account  form. 

There  is  another  objection,  which,  however,  the  business  man 
seldom  discovers  for  himself,  and  that  is,  that  the  account  form 
of  statement  does  not  permit  of  comparison.  Comparatively  few 
business  men  realize  that  the  first  step  towards  comprehensive 
financial  statements  upon  which  to  base  administrative  judgment 
is  the  comparison  of  one  period  with  a  preceding  one. 

Grouping  items  of  income  or  expense  around  the  business 
factors  and  arranging  these  factors  so  as  to  display  the  results 
of  operations  is  the  object  of  the  ideal  profit  and  loss  statement. 
To  do  this  with  the  trading  and  profit  and  loss  account  would 
require  so  many  sections  as  to  make  it  almost  impracticable. 
Such  an  account  would  also  contain  much  useless  and  confusing 
balancing  and  carrying  down. 

The  statement  of  income  and  profit  and  loss  has  three  distinct 
advantages.  First,  it  is  understood  by  the  layman.  He  under- 
stands it  because  he  would  determine  his  profit  that  way  if  he 
were  doing  it  himself.  Second,  it  permits  of  the  comprehensive 
grouping  of  items  without  the  useless  bookkeeping  technicalities. 
Third,  it  facilitates  comparison. 

The  facts  which  it  sets  forth  are  the  same  as  those  shown 
in  a  trading  and  profit  and  loss  account.  The  manner  of  presen- 
tation tends  however  to  convey  a  clearer  impression  of  the 
situation.  The  form  is  known  as  a  statement  in  "report"  form. 
It  is  also  called  the  "running"  form. 

In  connection  with  the  accounts  of  R.  J.  Dimlawn  as  set  forth 
in  problem  three  it  will  be  remembered  that  the  results  of 
operations  for  the  month  of  May  were  embodied  in  a  trading 
and  profit  and  loss  account. 

29 


Elementary  Accounting  Problems 

The  profit  for  the  month  exclusive  of  Mr.  Dimlawn^s  draw- 
ings of  $75.  was  $702.58.  The  proprietor's  account,  after  the 
profit  had  been  added  and  the  drawings  charged,  showed  a  bal- 
ance of  $2,346.15. 

During  the  month  of  June  there  was  not  much  variation  in  the 
transactions  except  that  Dimlawn  sold  a  small  bill  of  goods  to 
a  dealer  in  an  outlying  district  for  which  he  took  the  party's  note 
in  the  amount  of  $384.24.  The  note  was  dated  June  1 1,  1910, 
and  bore  interest  at  the  rate  of  6%  per  annum. 

A  trial  balance  of  the  ledger  before  closing  on  June  30,  1910, 
included  the  following  items :  furniture  and  fixtures,  $350 ;  notes 
payable,  $10,000;  sales  returns,  $29.99;  advertising,  $500;  mer- 
chandise inventory,  $9,854.32;  wages  accrued,  $14.50;  accounts 
payable,  $1,845.33;  cash,  $2,600.06;  auto  expense,  $76.29;  wages 
of  saleswomen,  $218.75;  wages  of  janitor,  $40;  proprietorship, 
$2,346.15;  office  expense,  $23.75;  sales  allowances,  $17.25;  auto- 
mobile, $1,200;  accounts  receivable,  $82.43;  inward  freight, 
$71.29;  rent,  $75;  sales,  $5,319.86;  insurance  (expense),  $5; 
trade  discount  on  purchases,  $187.94;  commissions  to  sales- 
woman, $185.47;  interest  on  bank  balance,  $18.75;  purchases, 
$3,758.92;  commissions  accrued,  $13.25;  notes  receivable, 
$384.24 ;  interest  accrued  on  notes  payable,  $93.67 ;  provision  for 
depreciation  of  furniture  and  fixtures,  $10;  purchase  allowances, 
$26.50;  provision  for  depreciation  of  auto,  $20;  purchase  re- 
turns, $12.72;  interest  on  notes  receivable,  $1.36;  reserve  for 
depreciation  of  furniture  and  fixtures,  $20 ;  insurance  unexpired, 
$50 ;  packing  supplies,  $98.75 ;  accrued  interest  on  notes  receiv- 
able, $1.36;  salary  of  bookkeeper,  $60;  reserve  for  depreciation 
of  auto,  $40;  stationery  and  printing,  $65;  light,  $12.86;  interest 
on  notes  payable,  $49.30;  drawings,  $100. 

The  inventories  June  30,  1910,  were  as  follows :  merchandise, 
$10,463.58;  gasolene,  $5.40;  packing  supplies,  $25;  stationery 
and  printing,  $40;  advertising  paid  in  advance,  $300;  postage 
(charged  to  office  expense),  $2.50.  Auto  expense  is  to  be  dis- 
tributed, 75%  to  inward  cartage,  25%  to  delivery  expense. 

There  has  been  an  error  of  $1.25  made  in  accruing  the  wages 
of  saleswomen.  The  error  understating  the  wages  accrued 
was  discovered  after  the  trial  balance  was  taken  off.  There  is 
also  an  item  of  $3.47  in  the  accounts  receivable  which  was  offset 

30 


Problem  Number  Four 


against  an  account  payable  in  settlement.     This  is  to  be  taken 
into  consideration  in  solving  the  problem. 

From  the  foregoing,  together  with  the  trading  and  profit  and 
loss  account  in  problem  three  prepare : 

(a)  A  working  sheet,  in  which  attention  is  given  to  the 
planning  of  the  accounts,  so  as  to  facilitate  the  preparation  of  the 
financial  statements. 

(b)  A  balance  sheet — June  30,  19 10. 

(c)  A  statement  of  income  and  profit  and  loss  for  the  months 
of  June  and  May,  1910,  respectively. 

SOLUTION  TO  PROBLEM  No.  4  . 

R.    J.    DiMLAWN 

Working  Sheet — ^June,  1910 


Debits 

Trial 

Balance 

June  30, 

1910, 

Before 

Closing 

Adjustments 

Balance 

Sheet, 

June  30, 

1910 

Income 
and  Profit 

Dr. 

Cr. 

Loss 
Items 

Furniture    and    Fix- 
tures     

$350.00 
1,200.00 

9,854.32 

2,600.06 

82.43 

384.24 

1.36 

50.00 

76.29 

3,758.92 
71.29 

$350.00 
1,200.00 

Automobile 

Merchandise — Inven- 
tory     

Cash    

$10,463.58 

(*$6o9.26) 

2,600.06 

78.96 

384.24 

1.36 
50.00 

Accounts  Receivable. 

3.47 

Notes  Receivable.... 

Accrued    Interest   on 
Notes  Receivable. . 

Insurance  Unexpired. 

Auto  Expense 

Purchases 

(  70.89 
(    5-40 

3,758.92 
71.29 

53.17 
29.99 
17.25 
17.72 
220.00 

Inward  Freight 

Inward  Cartage 

53.17 

Sales  Returns 

29.99 
17.25 

**'*2i875 

185.47 
500.00 

98.75 
60.00 

23-75 
65.00 
75.00 
12.86 
40.00 
5.00 

Sales  Allowances.. .. . 

Delivery  Expense. .. . 

Wages  of  Saleswomen 

Commissions  to 

Saleswomen 

17.72 
1.25 

185.47 
200  00 

Advertising 

300.00 
25.00 

Packing  Supplies 

Salary  of  Bookkeeper 

Office  Expense 

Stationery  &  Printing 
Rent  

73.75 
60.00 

2.50 
40.00 

21.25 
25.00 
75.00 
1286 

Light  

Wages  of  Janitor 

Insurance  (expense). 

40.00 
5.00 

' 

'Indicates  a  credit  item. 


31 


Elementary  Accounting  Problems 


Working  Sheet— Cow/mM^cf. 

Debits 

Trial 

Balance 

June  30, 

1910, 

Before 

Closing 

Adjustments 

Balance 

Sheet, 

June  30, 

1910 

Income 
and  Profit 

Dr. 

Cr. 

Loss 
Items 

Interest   on   Notes 
Payable   

49-30 

10.00 

20.00 
100.00 

49.30 
10.00 

Provision    for    Depr. 
R  &  F 

Provision    for    Depr. 
Auto  

20  00 

Drawings  ". 

fioo.oo 

$10,463.58 
5-40 

25.00 

40.00 

300.00 
2.50 

New  Accounts 
Merchandise —  Inven- 
tory (new) 

$10,463.58 
540 

25.00 

40.00 

300.00 
2  en 

Gasolene — Inventory. 

Packing    Supplies — 

Inventory  

Stationery  &  Printing 
— Inventory  

Advertising  Paid  in 
Advance 

Postage — Inventory. . 

!                  "^ 

Total    

$19,940.03    S^TO.QOR  62    Jl^TO  OTO  8/1 

$15,601.10 

$4,336.71 

^        ^             -r 

tOff  set  to  proprietorship. 


Credits 

Trial 

Balance 

June  30, 

1910, 

Before 

Closing 

Adjustments 

Balance 

Sheet, 

June  30, 

1910 

Income 
and  Profit 

Dr. 

Cr. 

Loss 
Items 

Wages  Accrued 

$14-50 

13-25 

1,845-33 

10,000.00 

93-67 

20.00 
40.00 

2,346-15 
5,319-86 

187.94 
26.50 
12.72 

18.75 
1.36 

$1.25 

$15-75 

13-25 

1,841-86 

10,000.00 

93-67 

20.00 

40.00 

2,346-15 

Commissions  Accrued 

Accounts  Payable.... 

$3.47 

Notes  Payable 

Interest   Accrued   on 
Notes  Payable 

R  e  s  e  rve — Depr.  F. 
&  F 

Reserve — Depr.  Auto 

Proprietorship 

Sales 

5,319.86 

187-94 
26.50 
12.72 

18.75 
1.36 

Trade  Discount  on 
Purchases 

Purchase   Allowances 

Purchase  Returns...  . 

Interest  on  Bank  Bal- 
ances   

Interest   on    Notes 
Receivable 

Total  

$19,940.03 

$3-47 

$1.25 

$14,370.68 

$5,567.13 

The  working  sheet  above  presented  differs,  it  will  be  noted, 
from  those  previously  shown.    The  variation  consists  in  separat- 

32 


Problem  Number  Four 

ing  it  into  two  sections  and  balancing  each  section  separately. 
If  the  totals  of  the  adustment  columns  are  applied  to  the  trial 
balance  column  the  result  should  be  equaled  by  the  total  of  the 
balance  sheet  column  and  the  column  containing  the  income  and 
profit  and  loss  items.  When  used  this  way  the  working  sheet 
does  not  establish  the  net  profit  or  loss  nor  adjust  the  proprietor's 
account. 

As  used  in  the  solution  of  this  problem  the  first  column  in 
each  section  shows  the  trial  balance  taken  from  the  general  ledger 
before  closing.  To  these  figures  are  applied  the  closing  and 
adjusting  entries,  after  the  application  of  which,  the  items  are 
classified  as  between  balance  sheet  and  profit  and  loss  items. 

The  journal  entries  supporting  the  adjustment  column  and 
which  by  the  way  should  always  be  prepared  by  the  student  and 
not  neglected  as  of  no  consequence,  are  given  below  : 

Merchandise — Inventory  (new) $10,463.58 

Gasolene — Inventory   5.40 

Packing  Supplies — Inventory 25.00 

Printing  &  Stationery — Inventory 40.00 

Advertising  Paid  in  Advance 300.00 

Postage — Inventory   2.50 

To  Merchandise — Inventory  (old) $10,463.58 

Auto  Expense 5.40 

Packing  Supplies 25.00 

Printing  &  Stationery 40.00 

Advertising 300.00 

Office  Expense ■,  2.50 

To  set  up  inventories  of  merchandise,  supplies  and 
prepaid  accounts,  in  closing  the  books  at  June  30, 
1910. 

Inward  Cartage $53-17 

Delivery  Expense '^7-72 

To  Auto  Expense 70.89 

To  distribute  the  auto  expense  for  the  month  in  the 
proportions  of  75%  and  25%,  respectively. 

Wages  of  Saleswomen $1.25 

To  Wages  Accrued $1.25 

To  correct  error  in  above  accounts. 

Accounts  Payable. $3.47 

To  Accounts  Receivable $347 

For  item  in  accounts  receivable  offset  against  ac- 
counts payable  in  settlement  with 

Planning  the  accounts  means  arranging  the  accounts  so  that 
they  will  be  in  the  order  in  which  they  appear  in  the  statements 

33 


Elementary  Accounting  Problems 


when  needed.  There  is  no  doubt  about  the  advisabiHty  of  plan- 
ning the  accounts  in  the  ledger.  To  attempt  to  plan  them  in  the 
working  sheet  when  solving  problems  is  undoubtedly  a  waste  of 
time.  The  accounts  should  be  entered  on  the  working  sheet, 
ordinarily,  in  the  order  that  they  appear  in  the  problem.  In  so 
doing  the  opportunity  for  error  is  lessened.  This  order  has  the 
added  advantage  of  getting  all  the  accounts  before  one  and  adjust- 
ing them  before  having  to  puzzle  over  the  arrangement. 

The  financial  statements  called  for  by  the  problem  appear 
below : 

R.  J.  DIMLAWN 
Balance  Sheet— June  30,  1910 


Assets: 


Furniture  &  Fixtures $35o.oo 

Automobile $1,200.00 

Working  &  Trading  As- 
sets: 

Merchandise  —  Inven- 
tory    $10,463.58 

Gasolene — Inventory  . .  5.40 

Packing  Supplies  —  In- 
ventory  25.00 

Stationery  &  Printing — 
Inventory  40.00 

Postage  2.50 

Total    Working    & 
Trading  Assets $10,536.48 

Current  Assets: 

Cash   in   hand   and   on 

deposit    $2,600.06 

Accounts  Receivable.. .         78.96 

Notes  Receivable 384.24 

Accrued  Interest  on 

Notes  Receivable 1.36 

Total  Current  Assets.  $3,064.62 

Deferred  Charges  to  Expense: 
Insurance    Unexpired. .        $50.00 
Advertising  Paid  in  ad- 
vance          300.00 

Total  Deferred  Charges 
to  Expense $350.00 

Total  Assets $15,501.10 


Liabilities  and  Capital: 


Current  Liabilities: 

Wages  Accrued $1575 

Commissions  Accrued..  13.25 

Accounts  Payable 1,841.86 

Notes  Payable 10,000.00 

Interest  Accrued  on 

Notes  Payable 93-67 

Total  Current  Lia- 
bilities   $11,964.53 

Reserves : 
Depreciation : 
Furniture  &  Fixtures..       $20.oa 
Automobile 40.00 

Total  Reserves $60.00 

Proprietorship $3,476.57 


Total   Liabilities   & 
Capital $15,501.10 


34 


Problem  Number  Four 


R.  J.  DIMLAWN 

Statement  of  Income  and  Profit  and  Loss  for  the  Months  of  June 
AND  May,  1910,  Respectively 


June  30, 
1910 

May  31, 
1910 

$5,319-86 
29-99 

$4,138-78 
164.53 

$5,289.87 

$3,974-25 

$17-25 
17.72 

$7.82 
69.63 

$34.97 

$77.45 

$5,254.90 

$3758.92 
12.72 

$3,896.80 
$2,559.05 

$3,746.20 

$26.50 
187.94 

$2,559.05 

$137.49 
88.15 

$214.44 

$225.64 

$3,531-76 
71.29 
53-17 
73-75 

$2,333-41 
45-77 
30-21 
65.00 

$372997 
609.26 

$3,120.71 

$2,134.19 

$2,474-39 
108.38 

$2,366.01 

$1,530-79' 

$220.00 

185-47 

200.00 

12.86 

$221.50 

165.02 

150.25 

14.72 

$618.33 

$551.49 

$1-515-86 

$979.30 

Gross  Sales 

Less — Sales  Returns 

Net  Sales , 

Deductions  from  Sales : 

Sales  Allowances , 

Delivery  Expense , 

Total  Deductions  from  Sales 

Income  from  Sales 

Cost  of  Sales : 

Gross  Purchases 

Less — Purchase  Returns 

Net  Purchases 

Deduction  from  Purchases : 

Purchase  Allowances 

Trade  Discount  on  Purchases 

Total  Deductions  from  Purchases 

Cost  of  Purchase 

Inward   Freight 

Inward  Cartage 

Packing  Supplies 

Total 

Deduct — Increase  in  Inventorj'^ 

Total  Cost  of  Sales 

Gross  Profit  on  Sales 

Selling  Expense : 

Wages  of  Saleswomen 

Commissions  to  Saleswomen 

Advertising 

Light  

Total  Selling  Expense 

Selling  Profit 


35 


Elementary  Accounting  Problems 


June  30, 
1910 

May  31, 
1910 

Statement — Continued. 

Administrative  Expense : 

Salary  of  Bookkeeper 

$60.00 
21.25 
25.00 
40.00 

$60.00 
18.50 

Office  Expense 

Stationery  and  Printing 

12.  "^0 

Wages  of  Janitor 

4.0.00 

Total  Administrative  Expense 

$146.25 
$1,369.61 

$18.75 
1.36 

$20.11 

$I'^I,00 

Net  Profit  on  Sales — Income  from  Operation 

Income  from  Sources  other  than  Operation: 
Interest  on  Bank  Balance 

$848.30 
$8.65 

Interest  on  Notes  Receivable 

Total  Other  Income 

$8  6=; 

Total  Income 

$1,389.72 

$75-00 

5-00 

49-30 

$856.95 
$71;. 00 

Deductions  from  Income : 

Rent       

Insurance  

■^.00 

Interest  on  Notes  Payable 

44.^7 

Total  Deductions  from  Income 

$129.30 
$1,260.42 

$10.00 
20.00 

$124  ?7 

Net  Income — Profit  and  Loss 

$7^2  c;8 

Profit  and  Loss  Charges : 

Provision  for  Reserves  for  Depreciation 
Furniture  and  Fixtures 

$10.00 

Automobile 

Total  Profit  and  Loss  Charges 

$30.00 

$1,230.42 
100.00 

$1,130.42 
2,346.15 

$3,476.57 

$30.00 

$702.58 
75.00 

Profit  and  Loss  for  the  period 

Deduct — Drawings  

Profit  and  Loss  added  to  Proprietorship 

$627.58 
1,718.57 

Proprietorship  beginning  of  period 

Proprietorship  end  of  period 

$2,346.15 

36 


Problem  Number  Four 

Problem  No.  4A  (Practice) 

From  the  following  transcript  of  accounts  taken  from  the 
books  of  John  H.  Elwell  prepare  a  statement  of  income  and 
profit  and  loss  for  the  year  ended  December  31,  191 1 : 

Rent-income,  $2,000;  interest  on  notes  payable,  $15;  interest 
on  bank  balance,  $20;  taxes,  $1,350;  interest  on  notes  receivable, 
$250;  insurance,  $144;  salary,  John  H.  Elwell,  $2,500;  office 
expenses,  $25 ;  trade  discount  on  purchases,  $500 ;  office  salaries, 
$75;  land  and  buildings,  $80,000;  capital,  $106,329;  furniture  and 
fixtures  $1,500;  accounts  payable,  $7,500;  cash,  $2,456;  notes 
payable,  $3,000;  accounts  receivable  $12,000;  reserve  for  de- 
preciation of  buildings,  $2,000;  notes  receivable,  $5,000;  merchan- 
dise-inventory, January  1,  191 1,  $18,000;  purchases,  $20,000; 
sales  returns,  $100;  reserve  for  depreciation  of  furniture  and 
fixtures  $75;  salesmen's  commissions,  $2,500;  advertising,  $1,000; 
drawing  account,  J.  H.  Elwell,  $50  (credit)  ;  heat  and  light,  $50; 
sales  $25,000. 

Inventory,  December  31,  191 1,  $22,475;  unexpired  insurance, 
$44;  purchases  not  included  above,  $350;  light  omitted  above, 
$12 ;  interest  on  accounts  receivable  $10. 


37 


Elementary  Accounting  Problems 

PROBLEM  No.  5 
Demonstration- 

James  Winston,  who  for  several  years  has  been  engaged  in 
the  manufacture  and  sale  of  men's  shirts,  feels  that  on  account  of 
his  declining  years  it  is  desirable  that  he  should  take  into  partner- 
ship with  him  two  of  his  employes. 

The  factory  is  located  at  Troy,  New  York,  while  the  selling 
and  administrative  office  is  in  New  York  City.  The  general  books 
are  kept  in  New  York,  monthly  reports  of  operations  being  re- 
ceived from  the  factory. 

The  shirt  on  account  of  a  peculiar  and  novel  arrangement 
of  the  collar  band  and  Winston's  originality  in  advertising  has 
become  extremely  well-known  and  popular. 

It  has  been  Winston's  practice  during  the  last  few  years  to 
withdraw,  as  soon  as  the  profits  for  the  year  have  been  deter- 
mined, an  amount  equal  to  the  profits  in  excess  of  $150,000. 

The  articles  of  copartnership  provide  that  the  new  partners, 
namely,  F.  H.  Northrup  and  T.  E.  Ames  shall  make  investments 
of  $150,000  and  $100,000  respectively.  Northrup  is  to  pay  in 
$25,000  as  at  the  close  of  business  on  December  31,  191 1 ;  while 
Ames  is  to  pay  in  $20,000  as  of  the  same  date.  The  balance  of 
each  investment  is  to  be  charged  with  interest  at  the  rate  of 
6  per  cent  per  annum,  which  interest  is  to  be  credited  to  Winston's 
drawing  account. 

It  is  provided  in  the  agreement  that  the  goodwill,  estimated 
by  Winston  on  the  basis  of  excess  income  averaged  for  a  period 
of  ten  years  and  capitalized  at  6  per  cent,  shall  be  valued  at 
$1,500,000  and  shall  be  set  up  before  the  new  partners'  accounts 
are  opened. 

Profits  are  to  de  determined  monthly.  The  existing  system  Is  to 
be  extended  so  that  book  inventories  will  be  possible.  Profits 
are  to  be  divided:  Winston,  one-half;  Northrup,  three-tenths; 
AmeSj  one-fifth. 

38 


Problem  Number  Five 


A  trial  balance  of  the  general  ledger  of  James  Winston  on 
December  31,  1911,  before  closing,  is  as  follows: 


Debits 

Land,  buildings  and  equip- 
ment     $  750,000 

Machinery  and  tools  275,000 

Auto  trucks    25,000 

Furniture  and  fixtures  ....  12,000 

Securities  owned 200,000 

Materials  and   supplies,  in- 
ventory  12/31/10 127,896 

Goods     in     process — inven- 
tory 12/31/10 75,423 

Finished     goods — inventory 

12/31/10     32,867 

Cash    5^,477 

Accounts  receivable  163,941 

Notes  receivable  50,000 

Insurance  unexpired   598 

Advertising  unexpired   5,875 

Gross  purchases    376,825 

Sales  returns   2,749 

Sales   allowances    1,846 

Trade  discount  on  sales 7,411 

Labor     293,865 

Manufacturing  supplies   ...  1,527 

Factory  expense   20,902 

Salaries  of  salesmen 25,119 

Traveling       expenses       of 

salesmen    8,623 

Advertising    44,725 

Commissions  to  salesmen..  9,462 
Salaries    of    clerks — N.    Y. 

office     8,728 

Office  expense — N.  Y 1,243 

Printing    and     stationery — 

N.  Y 547 

Telegraph   and  telephone — 

N.  Y 263 

Legal  expense — N.  Y 5,000 

General  expense — N.  Y. . . .  7,496 

Interest  on  b.  &  m.  payable  15,000 

Interest  on  notes  payable..  1,125 

Cash  discount  on  sales  ....  4,749 

Taxes     6,273 

Insurance    6,597 

Bad  debts — written  off 746 

Total  debits  $2,620,898 


Credits 

James  Winston,  proprietor. $  848,654 

Bond  and  mortgage  payable  300,000 

Taxes   accrued    6,273 

Wages  accrued   173 

Accounts  payable   94,862 

Notes  payable   75,ooo 

Interest       accrued  —  notes 

payable     1,125 

Interest    accrued    on    bond 

and  mortgage  payable   ..  11,250 
Reserve  for  depreciation  of 
buildings   and   equipment, 

etc 302,000 

Gross    sales    949,979 

Purchase  returns   732 

Purchase  allowances  261 

Trade     discount     on     pur- 
chases   9,536 

Income       from      securities  * 

owned    10,000 

Interest  on  bank  balances . .  947 

Rent  of  factory  sheds 600 

Interest  on  notes  receivable  462 

Cash  discount  on  purchases  9,044 


Total  credits  $2,620,898 


39 


Elementary  Accounting  Problems 

The  inventories  at  the  end  of  the  year  were:  Materials  and 
suppHes,  $142,719;  goods  in  process,  $86,941;  finished  goods, 
$47,868. 

From  the  foregoing  prepare : 

(a)  Manufacturing,  trading  and  profit  and  loss  account  for 
the  year  ended  December  31,  191 1. 

(PI  General  balance  sheet — December  31,  191 1,  after  the  ad- 
mission of  the  new  partners. 


S01.UT10N  TO  Problem  No.  5 

A  working  sheet  is  unnecessary  in  the  solution  of  this  problem. 
To  use  one  would  involve  a  waste  of  time.  Two  of  the  advan- 
tages of  a  working  sheet  are  the  insuring  of  accuracy  in  the 
results  where  adjustments  are  numerous  and  freedom  from  worry 
as  to  the  completeness  and  arrangement  of  the  accounts  until 
the  accurate  results  are  obtained.  In  this  case  neither  of  these 
two  obstacles  appears.  The  adjustments  are  few  and  the  arrange- 
ment is  ideal.  It  would  therefore  seem  preferable  to  express  such 
facts  as  supplement  the  trial  balance  in  journal  entry  form  and 
take  cognizance  of  them  in  preparing  the  required  statements. 

Viewed  with  regard  to  their  relation  to  the  books  and  accounts 
the  entries  will  be  seen  to  be  of  two  kinds:  first,  those  which 
close  the  books  of  James  Winston  and  thereby  determine  his 
profit  for  the  year ;  second,  those  which  set  up  the  goodwill  and 
adjust  the  partners'  accounts.  Those  in  the  first  class  have  to  do 
with  the  nominal  accounts  from  which  the  manufacturing,  trading 
and  profit  and  loss  account  is  made.  The  others  appertain  only 
to  the  real  accounts  and  may  be  made  after  the  nominal  accounts 
have  been  closed. 

The  question  sometimes  arises  as  to  whether  or  not  new  books 
shall  be  opened.  Nothing  would  seem  to  be  gained  by  opening 
new  books,  5ince  the  change  involves  only  the  adjustment  of 

40 


Problem  Number  Five 

proprietorship.  The  assets  and  HabiHties  will  remain  unchanged. 
The  nominal  accounts  required  in  the  future  will  be  the  same. 
Why,  then,  go  to  the  trouble  of  opening  new  books  on  account  of 
the  change  in  proprietorship?  The  old  books  may  have  been 
filled  up,  or  it  may  have  been  the  practice  of  the  bookkeeper  to 
open  new  books  at  the  beginning  of  each  year.  Such  might  be 
the  reasons  for  so  doing  in  this  case.  Surely  it  would  not  be 
made  necessary  by  the  admission  of  new  partners.  If  new  books 
were  opened,  it  is  probable  that  in  accordance  with  the  reading 
of  the  problem  the  entries  would  be  made  on  the  old  books  and  the 
accounts  transferred  after  they  had  been  adjusted. 

The  closing  entries  would  require  a  charge  to  inventory  (new) 
and  a  credit  to  inventory  (old)  for  the  three  classes  of  inventory 
as  follows: 

Materials  and  supplies — inventory   (new)    $142,719 

Goods  in  process — inventory  (new)   86,941 

Finished  goods — inventory   (new)    47,868 

To  materials  and  supplies — inventory  (old)   $142,719 

Goods  in  process — inventory  (old)    86,941 

Finished  goods — inventory  (old)   47,868 

The  goodwill  is  frequently  the  cause  of  considerable  mis- 
understanding. The  situation  in  this  instance  is  precisely  the 
same  as  it  would  have  been  if  James  Winston  in  walking  along  the 
street  had  suddenly  found  at  his  feet  a  package  of  negotiable 
securities  for  which  no  owner  could  subsequently  be  found  and 
had  determined  to  invest  them  in  his  business.  No  one  would 
think  of  saying  that  when  he  sold  an  interest  in  his  business 
James  Winston  sold  nothing  but  the  bonds.  The  bonds  would 
have  been  but  a  part  of  the  assets  representing  Winston's  equity 
in  the  business  out  of  which  he  sold  a  share  upon  which  a  value 
of  $250,000  perhaps  had  been  placed. 

Goodwill,  granting  that  it  was  worth  $1,500,000,  which  need 
not  concern  us  for  the  purpose  of  this  discussion,  was  not  different 
from  bonds  except  that  the  bonds  were  susceptible  to  the  physical 
touch  while  goodwill  was  not.  If  it  existed  and  was  worth  the 
value  stated,  it  was  one  of  the  assets  in  which  Winston's  equity 


41 


Elementary  Accounting  Problems 

was  vested  and  nothing  more.  When  he  sold  from  his  equity 
$250,000,  he  did  so  without  involving  the  goodwill  any  more  than 
any  other  of  the  assets.  The  eifect  of  setting  it  up  was  not  to 
enable  him  to  realize  upon  it  when  he  sold  a  share  of  his  proprie- 
torship to  his  partners.  Their  investment  from  the  point  of  view 
of  realization  was  of  minor  importance  compared  to  Winston's. 
The  important  feature  of  the  copartnership  was  that  it  gave  each 
new  partner  a  voice  in  the  management.  Having  built  up  the 
business  Mr.  Winston,  or  his  heirs,  is  entitled  to  the  benefits 
accruing  from  the  goodwill.  Placing  a  value  upon  the  goodwill 
reduced  relatively  the  investment  of  the  new  partners.  It  placed 
beyond  dispute  the  value  of  the  goodwill  as  among  the  partners 
in  case  of  death  or  dissolution  from  other  causes. 

In  order  to  set  up  the  goodwill  the  following  entry  might 
be  made: 

12/31/11    Goodwill  $1,500,000 

To  James  Winston,  proprietor  $1,500,000 

To  place  on  the  books  the  goodwill  of  James 
iWinston,  proprietor,  prior  to  the  entrance 
into  the  business  of  Messrs.  F.  H.  Northrup 
and  F.  E.  Ames  as  copartners. 

It  seems  unnecessary  to  frame  the  entry  which  would  close  out 
the  nominal  accounts  on  the  books.  It  should  suffice  if  attention 
is  called  to  the  fact  that  two  entries  would  accomplish  the  closing 
after  the  inventories  have  been  closed  out.  If  reference  is  made 
to  the  trial  balance  it  will  probably  be  seen  that  the  first  entry 
would  consist  in  charging  profit  and  loss  and  crediting  the  ac- 
counts on  the  debit  side  of  the  trial  balance,  beginning  with  gross 
purchases,  while  the  second  would  charge  the  accounts  on  the 
credit  side,  beginning  with  gross  sales,  and  credit  profit  and  loss. 
This  explanation  is  made,  of  course,  on  the  assumption  that  no 
intermediate,  or  group  accounts,  to  reflect  manufacturing  or  trad- 
ing are  made  in  closing. 

The  practice  of  raising  group  accounts  on  the  books  in  closing 
is  a  subject  concerning  which  questions  are  often  asked.  The 
answer  seems  to  consist  in  saying  that  if  a  statement  is  not  made 

42 


Problem  Number  Five 
< 

the  books  should  show  the  intermediate  steps  in  closing;  if  a 
statement  is  made  from  the  books,  it  is  much  easier  to  prepare  the 
statement  from  a  comprehensive  profit  and  loss  account  showing 
the  details  without  grouping  than  from  the  intermediate  accounts 
which  are  subsequently  closed  into  profit  and  loss.  It  is  probable 
that  the  statement  in  account  form  which  is  now  known  as  the 
"manufacturing,  trading  and  profit  and  loss  account"  came  from 
a  profit  and  loss  account  in  the  ledger  of  which  it  is  a  counterpart. 
The  solution  of  this  problem  will  perhaps  be  clearer  if  the  man- 
ufacturing, trading  and  profit  and  loss  account  called  for  by  the 
problem  is  now  presented  while  the  entries  adjusting  the  proprie- 
tor's accounts  are  postponed  until  after  the  books  have  been 
closed. 

JAMES  WINSTON 

Manufacturing,  Trading  and  Profit  and  Loss  Account  for  the  year  ended 
December  31,  191 1 


Debit 

i/i/ii     ^ 
Inventories : 

Materials  and  supplies. 

Goods  in  process 

Gross  purchases 

Labor  

Manufacturing  supplies  . 
Factory  expense 


Manufacturing  section  Credit 

12/31/11 

Purchase  returns ?  73^ 

$     127,896       Purchase  allowances 261 

75,423       Trade     discount    on    pur- 

376,825  chases 9.536 

293,865       Inventories : 

1,527  Materials  and  supplies...       142,719 

20,902  Goods  in  process 86,941 

Balance  carried  down,  be- 
ing cost  of  goods  mtgd. . .      656,249 

$896,438  $896,438 


43 


Elementary  Accounting  Problems 


Debit  Trading   section                                   Credit 

Balance  brought  down,  be-  Gross  Sales $    949,979 

ing  cost  of  goods  mfgd.  .$  656,249 

Inventory,  fin.  goods  i/i/ii  32,867       Inventory,  fin.  goods  12/31/11     47,868 

Sales  returns 2,749 

Sales  allowances   1,846 

Trade  discount  on  sales  . . .  7,411 

Salaries  of  salesmen 25,119 

Traveling  expenses  of  sales- 
men      8,623 

Advertising  44,725 

Commission  to  salesmen. . .  9,462 

Balance  carried    down   be- 
ing gross  profit 208,796 

$997,847  $997,847 


Debit 


Profit  and  loss  section 


Credit 


Salaries    of    clerks — N.    Y. 

office   $  8,728 

Ofl&ce  expense — N.  Y 1,243 

Printing    and    stationery — 

N.  Y 547 

Telegraph   and  telephone — 

N.  Y 263 

Legal  expense — N.  Y 5,000 

General  expense — N.  Y.  . . .  7,496 
Interest  on  bond  and  mort- 
gage payable    15,000 

Interest  on  notes  payable..  1,125 

Cash  discount  on  sales 4,749 

Taxes   6,273 

Insurance    6,597 

Bad   debts — written   off....  746 
Balance   carried   down,   be- 
ing net  profit  172,082 


Balance  brought  down,  being 

gross  profit    $   208,796 

Income      from      securities 

owned     

Interest  on  bank  balances.. 

Rent  of  factory  sheds 

Interest  on  notes  receivable 
Cash  discount  on  purchases 


10,000 

947 
600 


9,044 


$229,849 


$229,849 


Debit 


Drawings     $ 

Proprietorship  end  of  per- 
riod  998,654 


Proprietorship 
22,082 


Credit 


$1,020,736 


Balance  brought  down,  be- 
ing net  profit  $   172,082 

Proprietorship  beginning  of 
period  848,654 


$1,020,736 


44 


Problem  Number  Five 

Transfers     of     proprietor-  Balance  brought  down,  be- 

ship  :  ing  proprietorship  before 

To  F.  H.  Northrup $  150,000  adjustment $    998,654 

T.E.Ames 100,000      Goodwill 1,500,000 


$250,000 
Balance  being  *proprietor- 

ship  after  adjustment 2,248,654 


$2,498,654  $2,498,654 


While  nothing  was  said  in  the  problem  to  the  effect  that 
Winston  would  draw  out  $22,082  as  representing  profit  for  the 
year  191 1,  it  was  stated  that  his  established  practice  in  the  past 
had  been  to  withdraw  annually  an  amount  equal  to  the  profits  in 
excess  of  $150,000.  There  is  apparently  no  reason  why  he  should 
not  continue  the  practice  as  in  the  past.  The  statement  of  fact 
in  the  problem  relative  to  the  established  practice  constitutes  what 
might  be  called  a  *'hint"  and  one  on  which  the  person  attempting 
the  solution  of  a  problem  should  act. 

The  withdrawal  above  referred  to  would  have  the  effect  of 
reducing  cash.  The  transaction  expressed  in  the  form  of  journal 
entry  would  be  as  follows : 

James  Winston  proprietor   $22,082 

To  cash ^ .$22,082 

For  cash  withdrawn,  representing  profits  for  the  year 
ended  December  31,  191 1,  in  excess  of  $150,000. 

The  charge  might  have  been  made  to  profit  and  loss  instead 
of  the  proprietor's  account  if  the  profit  for  the  year  had  not  yet 
been  transferred. 

It  is  appropriate  now  that  entries  affecting  the  entrance  into 
the  business  of  the  partners  should  be  made.  Nothing  was  said 
in  the  problem  concerning  the  way  in  which  the  entrance  was  to 
be  effected.  Possibly  from  the  requirement  as  to  the  balance 
sheet  the  new  partners  are  to  contribute  new  capital  to  the  busi- 
ness ;  not  buy  a  share  of  the  old  business.    The  manner  of  mak- 


*  Proprietorship  of  James  Winston. 

45 


Elementary  Accounting  Problems 

ing"  the  entries  would  depend  upon  whether  the  new  partners  con- 
tributed new  capital  or  bought  a  share  of  Winston's  interest. 

Were  the  latter  the  case,  as  apparently  it  seems,  an  entry- 
charging  Winston's  proprietorship  account  and  crediting  the  pro- 
prietorship accounts  of  the  new  partners  would  suffice.  The 
cash  used  in  settlement,  would  be  paid  to  Winston  personally  and 
would  not  enter  into  the  business. 

As  the  matter  appears  herein,  Winston  allowed  Messrs.  Nor- 
thrup  &  Ames  to  come  into  the  business,  with  combined  cap- 
ital of  $250,000  of  which  they  paid  him  immediately  $45,000.  The 
balance  of  $205,000  was  loaned  to  them  by  Winston.  For  this 
loan  he  charged  them  interest  at  6  per  cent  which  was  credited  to 
his  drawing  account. 

An  entry  expressing  the  facts  would  read  as  follows : 

James  Winston,  proprietorship  $250,000 

To  F.  H.  Northrup,  proprietorship $150,000 

T.  E.  Ames,  proprietorship 100,000 

For  investments  of  F.  H.  Northrup  and  T.  E.  Ames 
in  the  business  of  James  Winston,  of  which  Messrs. 
Northrup  and  Ames  paid  him  in  cash  $25,000  and 
$20,000  respectively,  the  balance  in  each  case  bearing 
interest  at  6%  per  annum  chargeable  to  the  above 
mentioned  gentlemen  and  to  be  credited  to  the 
drawing  account  of  Mr.  James  Winston. 

After  making  the  adjustments  in  the  real  accounts  made  nec- 
essary by  the  above  and  previous  entries  the  balance  sheet  on  fol- 
lowing page  might  be  prepared.  No  mention  having  been  made  of 
a  new  firm  name,  it  may  be  assumed  that  the  firm  will  trade  under 
the  name  of  James  Winston,  which  in  New  York  State  is  possible 
if  certain  statutes  are  complied  with.  Such  law  requires  that 
there  shall  be  filed  with  the  clerk  of  the  county  in  which  the  busi- 
ness is  conducted,  a  certificate,  setting  forth  the  name  under  which 
the  business  is  conducted  and  the  true  or  real  full  name  or  names, 
of  the  party,  or  parties,  conducting  the  business,  with  the  cor- 
responding post  office  address,  or  addresses. 


46 


Problem  Number  Five 

JAMES   WINSTON 
General  Balance  Sheet — December  31,  1911 


Assets 

Land,  buildings  and  equip- 
ment    $  750,000 

Machinery  and  tools   $  275,000 

Auto  trucks  $  25,000 

Furniture  and  fixtures $  12,000 

Securities  owned   $  200,000 

Working  and  trading  assets : 

Materials  and  supplies... $  142,719 

Goods  in  process  86,941 

Finished  goods  47,868 

Total  working  and  trad- 
ing assets  $  277,528 

Current  assets : 

Cash $  29,395 

Accounts  receivable 163,941 

Notes  receivable 50,000 

Total  current  assets  ...$  243,336 

Goodwill  $1,500,000 

Deferred    charges    to    ex- 
pense : 
Insurance    premiums   un- 
expired   $  598 

Advertising  unexpired  . .  5,875 

$  6,473 

Total  assets $3,289,337 


Liabilities  and  capital 


Bond  and  mortgage  payable  $300,000 

Current  liabilities: 

Taxes  accrued    $  6,273 

Wages  accrued  173 

Accounts  payable  94,862 

Notes  payable   75i000 

Interest  accrued  on  bond 

and  mortgage  payable.  11,250 
Interest  accrued  on  notes 

payable     1,125 

Total  current  liabilities  $   188,683 

Reserve  for  depreciation  of 
buildings,  equipment,  etc.   $302,000 

Proprietorship : 
James  Winston. $2,248,654 
F.  H.  Northrup.      150,000 
T.  E.  Ames  ....      100,000 

Total  proprietorship  . .  .$2,498,654 


Total      liabilities      and 
capital    $3,289,337 


PROBI.EM  No.  5 A  (Practice) 

The  following  is  a  trial  balance,  before  closing,  of  the  general 
ledger  of  Robert  J.  McDougall  at  December  31,  191 1: 


47 


Elementary  Accounting  Problems 


Debits 

Labor   $  276,838 

Insurance    5.865 

Commissions  to  salesmen..  io,i94 
lyand,  buildings  and  equip- 
ment      628,576 

Securities  owned    200,000 

Auto  trucks   20,000 

Sales  returns   2,223 

Advertising    45.251 

Interest  on  notes  payable..  799 

Bad  debts — written  off 1,072 

Insurance  unexpired  628 

Machinery  and  tools  375,ooo 

Cash    48,739 

Trade  discount  on  sales...  7,381 

Interest  on  b.  &  m.  payable  15.000 

Factory  expense   i8,i74 

Salaries    of    clerks — N.    Y. 

office   11,456 

Furniture  and  fixtures  17,000 

Finished     goods — inventory 

12/31/10    33,693 

Advertising  unexpired   8,613 

Goods     in     process — inven- 
tory 12/31/10  77,329 

Gross  purchases 393,852 

Manufacturing  supplies   . . .  i,954 
Traveling  expenses  of  sales- 
men       8,196 

Legal  expense — N.  Y 3,500 

Taxes     7>77Z 

Telegraph   and  telephone — 

N.  Y 271 

Salaries  of  salesmen  25,071 

Materials    and    supplies    in- 
ventory 12/31/10   125,164 

Notes  receivable  47,000 

Sales  allowances  3,078 

Office  expense — N.  Y 3,243 

Cash  discount  on  sales 5,981 

Printing    and     stationery — 

N.  Y 547 

Accounts  receivable 166,687 

General  expense — N.  Y.    . .  4-750 

Total  debits   ....$2,600,898 


Credits 

Purchase  allowances  $  371 

Gross  sales  948,215 

Reserve  for  depreciation  of 
buildings   and   equipment, 

,  etc 274,175 

Interest    accrued    on    bond 

and   mortgage  payable...  11,250 
Robert  J.   McDougall,  pro- 
prietor      876,479 

Income       from       securities 

owned     10,000 

Cash  discount  on  purchases  8,872 

Bond  and  mortgage  payable  300,000 

Purchase  returns    622 

Rent  of  factory  sheds   772 

Taxes  accrued  5,784 

Interest  accrued — notes  pay- 
able     1,614 

Accounts  payable   81,112 

Trade     discount     on     pur- 
chases     1 1,300 

Interest  on  bank  balances..  918 

Wages  accrued   202 

Notes  payable   68,750 

Interest  on  note  receivable  462 


Total  credits   $2,6oo,J 


The  inventories  December  31,  191 1  were:  Materials  &  sup- 
plies, $139,987;  goods  in  process,  $88,847;  finished  goods, 
$48,694. 

48 


Problem  Number  Five 

Prepare : 

(a)  Manufacturing,  trading  &  profit  &  loss  account  for  the 
year  ended  December  31,  191 1. 

(b)  General  balance  sheet— December  31,  1911. 


49 


Elementary  Accounting  Problems 

PROBLEM  No.  6 

Demonstration 

The   following  is  a  trial  balance  of  the  general  ledger  of 
James  Winston,  June  30,  1912,  before  closing: 


Debits 

Land,  buildings  and  equip- 
ment   $   775,862 

Machinery  and  tools  281,427 

Auto  trucks  25,000 

Furniture  and  fixtures 12,000 

Material    and  supplies    12/ 

31/11    142,719 

Goods  in  process  12/31/11.  86,941 

Finished  goods  12/31/1 1...  47,868 

Cash  41,073 

Accounts  receivable 142,942 

Notes  receivable 40,000 

Goodwill 1,500,000 

Insurance   premiums   unex- 
pired       782 

Advertising  unexpired   7,496 

James  Winston,  drawings..  10,000 

F.  H.  Northrup,  drawings. .  3,000 

T.  E.  Ames,  drawings 3,000 

Gross  purchases   207,253 

Sales  returns 3,176 

Sales  allowances 941 

Outward  freight  4,903 

Trade  discount  on  sales 2,347 

Labor   160,769 

Manufacturing  supplies   ...  2,146 

Superintendence    3,000 

Heat,  light  and  power 800 

Repairs  to  machinery 427 

Office  salaries,  factory 3,750 

Offices  expenses,  factory  ..  986 
Miscellaneous    factory    ex- 
pense       1,207 

Salaries  of  salesmen  15,793 

Traveling  expenses  of  sales- 
men   4,211 

Advertising     20,960 

Commissions  to  salesmen..  5,355 
Salaries,  New  York  office..  4,598 
General  expenses.  New  York  3,742 
Interest  on  bond  and  mort- 
gage payable    9,000 

Interest  on  notes  payable..  3,000 

Cash  discount  on  sales....  2,389 


Credits 

Bond  and  mortgage  payable  $  300,000 

Taxes  accrued 3,379 

Wages  accrued   348 

Accounts  payable  80,157 

Notes  payable  50,000 

Interest    accrued    on    bond 

and  mortgage  payable  . . .  9,000 
Interest    accrued    on    notes 

payable 3,000 

Reserve  for  depreciation  of 

buildings,  equipment,  etc.  302,000 

James  Winston,  capital 2,046,154 

F.  H.  Northrup,  capital 150,000 

T.  E.  Ames,  capital  100,000 

Gross  sales  532,846 

Purchase  returns   427 

Purchase  allowances  275 

Trade  discount  on  purchases  5,682 
Income     from     securities 

owned     2,500 

Interest  on  bank  balances..  537 

Rent  of  factory  sheds 300 

Interest  on  notes  receivable  222 

Cash  discount  on  purchases  4,599 

Reserve  for  bad  debts  ....  1,270 


50 


L 


Problem  Number  Six 

(Debits  continued)  (Credits  continued) 

Rent,  New  York  office 4,000 

Taxes  3,379 

Insurance    3,184 

Provision  for  bad  debts  . . .  1,270 

Total  debits  $3,592,696        Total  credits $3,592,696 

On  April  ist,  1912,  Winston,  by  common  consent  withdrew 
the  securities  which  had  been  carried  at  $200,ocx)  and  on  which 
there  was  accured  interest  amounting  to  $2,500.  On  the  same 
date  Ames  paid  to  Winston  $20,000  on  account  of  his  invest- 
ment of  $100,000.  It  was  mutually  agreed,  that,  beginning  Janu- 
ary I,  1 91 2,  the  firm  should  depreciate  its  property  on  the  basis 
of  cost  at  the  beginning  of  each  period  and  make  the  correspond- 
ing charges  to  operations  at  the  end  of  each  six  months.  The 
rates  agreed  upon  were  5%  on  buildings,  8%  on  building  equip- 
ment, 10%  on  machinery  and  tools,  20%  on  auto  trucks,  12% 
on  furniture  and  fixtures. 

An  analysis  of  the  property  accounts  follows : 

Book  Value 

Items  Cost  Depreciation  Dec.  31, 191 1 

Land    $  100,000           $100,000 

Buildings    600,000  $185,000  415,000 

Building  equipment 50,000  10,000  40,000 

Machinery  and  tools 275,000  95,ooo  180,000 

Auto  trucks  25,000  10,000  15,000 

Furniture  and  fixtures 12,000  2,000  10,000 

Total   $1,062,000  $302,000  $760,000 

The  land,  based  on  assessed  valuations  and  sales  of  neighbor- 
ing parcels  during  the  latter  part  of  the  year  191 1,  was  estimated 
as  being  worth  $25,000  more  than  cost. 

It  is  to  be  remembered  that  according  to  the  copartnership 
agreement,  profits  are  to  be  divided,  50%  to  Winston,  30% 
to  Northrup  and  20%  to  Ames,  and  that  interest  at  6%  is  to 
be  charged  on  the  unpaid  portion  of  the  new  partners'  investment 
accounts  and  credited  to  Winston. 

The  inventories  June  30,  1912,  were  as  follows:  Materials 
and  supplies,  $164,924,  goods  in  process,  $75,826,  finished  goods, 
$63,926. 

From  the  foregoing  prepare : 

(a)     General  balance  sheet — June  30,  1912. 

51  • 


Elementary  Accounting  Problems 

(b)  Statement  of  income  and  profit  and  loss   for  the  six 
months  ended  June  30,  1912. 


Solution  to  Problem  No.  6 

It  will  be  seen  from  the  text  which  follows  the  trial  bal^ 
ance  that  certain  facts  must  be  taken  into  consideration  before 
the  statements  can  be  prepared. 

The  withdrawal  of  securities  with  the  accrued  interest  thereon 
has  been  taken  care  of  in  the  books.  The  entry  presumably 
consisted  in  charging  Winston  with  $202,500  and  crediting  se- 
curities owned  with  $200,000,  while  income  on  securities  owned 
was  credited  with  $2,500. 

The  payment  by  Ames  to  Winston  of  $20,000  reduced  the 

indebtedness  of  the  former  to  the  latter  and  would  affect  the 

interest.     On  the  basis  of  the  deficits  in  investments,  the  inter- 
est of  the  new  partners,  computed  at  6^/0   to  June  30,    191 2, 

would  amount  respectively  to  $3,750  and  $2,100.    These  amounts 

would  be  the  subject  of  an  entry  as  follow : 

F.  H.  Northrup,  drawing  account $3,750.00 

T.  E.  Ames,  drawing  account  2,100.00 

To  J.  Winston,  drawing  account $5,850.00 

For  interest  on  deficit  in  investments  of 
Northrup  and  Ames  as  follows: 

$150,000        $100,000 
25,000  20,000 

$125,000        $  80.000  @  i^%  =  $1,200 
.03  20,000 

$3,750.00  $    60,000  @   lJ/2%   =  900 


$2,100 

A  situation  such  as  exists  with  regard  to  the  capital  accounts 
in  this  copartnership  might  be  a  source  of  some  annoyance  to 
the  bookkeeper  in  computing  the  interest  by  reason  of  the  fact 
that  he  has  no  record  of  cash  payments,  such  as  are  considered 
above,  except  that  furnished  to  him  by  W^inston  or  Ames.  This 
annoyance  might  have  been  obviated  so  far  as  the  bookkeeper  is 

52 


Problem  Number  Six 

concerned,  if  in  making  the  entries  at  the  time  of  the  admission 
of  the  new  partners,  he  had  charged  accounts  for  "capital  sub- 
scribed," somewhat  after  the  manner  in  which  subscribers  to 
capital  stock  are  charged  for  subscriptions,  and  credited  the  cap- 
ital investment  accounts  of  the  respective  new  partners. 

As  cash  was  paid  in  the  "capital  subscribed"  account  would 
be  credited  and  if  the  cash  were  subsequently  paid  to  Winston, 
his  account  would  of  course  be  charged.  Under  such  procedure 
the  "capital  subscribed"  account  would  at  all  times  show  the 
amount  due  from  the  new  partners,  as  well  as  payments  with 
their  dates,  and  in  making  up  the  balance  sheet  the  accounts 
would  be  offset  against  the  capital  investment  accounts  thereby 
showing,  with  regard  to  the  new  partners,  the  exact  amount  of 
their  respective  investments. 

In  the  matter  of  property,  it  will  be  noted  that  the  land  had  ap- 
preciated. Such  appreciation  might  be  treated  in  one  of  three  ways : 
first,  as  an  offset  to  the  depreciation  on  building,  etc.,  second,  as  a 
profit,  and  third,  set  up  as  a  reserve.  Of  these  ways,  the  first  has 
no  logical  foundation,  since  the  land  is  quite  distinct  from  the 
buildings;  the  second  is  to  be  deplored  for  the  reason  that  it 
anticipates  profits ;  the  third  is  to  be  advocated,  if  any  cognizance 
at  all  is  to  be  taken  of  an  increase  in  value,  since  if  any  advantage 
or  gratification  is  to  be  derived  from  such  a  step  it  is  equally 
true  that  no  disadvantage  is  sustained. 

The  depreciation  is  properly  computed  on  the  basis  of  cost. 
The  rates  given  are  for  the  year.  For  the  six  months  under 
consideration  the  figures  are  as  follows: 

Buildings    $600,000  2^^%  $15,000 

Building  equipment 50,000  4%  2,000 

Machinery  and  tools 275,000  5%  i3,75o 

Auto  trucks 25,000  10%  2,500 

Furniture  and  fixtures  12,000  6%  720 

Tota    $33,970 

Whether  the  asset  shall  be  written  down  or  a  reserve  created 
depends  upon  opinion.  The  latter  method  seems  preferable  since 
the  desired  result  of  reducing  the  value  is  accomplished  without 
interfering  with  the  asset  account  which  should  show  the  cost, 
plus  or  minus  actual  additions  or  deductions,  of  physical  assets. 
The  entry  would  therefore  be: 

53 


elementary  Accounting  Problems 

Provision  for  depreciation  of  machinery  and  tools $13,750.00 

Provision  for  depreciation  of  buildings,  equipment,  etc..  20,220.00 
To  reserve  for  depreciation  of  buildings  and 

equipment,  etc $33,970.00 

The  statements  required  by  the  problem  are  as  follows: 

JAMES  WINSTON 

Statement  of  Income  and  Profit  and  Loss  for  the  six  (6)  months  ended 

June  30,  1 91 2 

Income : 

From  operations: 

Gross   sales    $  532,846 

Less   returns 3,176 

Net    sales $  529,670 

Deductions   from  sales : 

Sales    allowances    $  941 

Outward   freight    4,903 

Trade  discount  on  sales  2,347 

Total  deductions ..$  8,191 

Income  from  sales  $  521,479 

Cost  of  goods  sold: 
Manufacturing  cost: 

Gross  purchases  ^ .$  207,253 

Less  returns ^ 427 

Net  purchases    $  206,826 

Deductions  from  purchases: 

Allowances $  275 

Trade  discounts  on  purchases    5,682 

Total  deductions $  5,957 

Cost   of   purchases    $  200,869 

Deduct   increase   in    inventory — materials    and    sup- 
plies       22,205 

Cost  of  purchases  consumed  in  manufacturing $  178,664 

Manufacturing    supplies 2,146 

Labor    160,769 

Superintendence   3,000 

Heat,  light  and  power   800 

Repairs  to  machinery   427 

Provision   for  depreciation — machinery  and  tools..  13,750 

Office    salaries — factory 3,750 

Office    expenses — factory    986 

Miscellaneous  factory  expense 1,207 

Total   charges   to   manufacturing $  365,499 

Add  decrease  in  inventory  of  goods  in  process  11,115 

54 


Problem  Number  Six 

Manufacturing  cost $  376,614 

Deduct  increase  in  inventory  finished  goods 16,058 

Total  cost  of  goods  sold  ^ $  360,556 

Gross  profit  on  sales  $  160,923 

Selling  expense: 

Salaries  of  salesmen   $  I5,793 

Traveling  expenses  of  salesmen 4,211 

Commissions  to   salesmen    5,355 

Advertising 20,960 

Total  selling  expense    ^ $  46,319 

Selling   profit    - - $  114,604 

Administrative  expenses : 

Salaries,  New  York  office   $  4,598 

General  expense,  New  York  office  3,742 

Total  administrative  expense   ...^« $  8,340 

Net  profit  on   sales — income   from   operation $  106,264 

From  sources  other  than  operation: 

Income  from  securities  owned $  2,500 

Interest   on   bank  balances 537 

Rent  of  factory  sheds    300 

Interest  on  notes  receivable 222 

Cash  discount  on  purchases   4,599 

Total  other  income   .$  8,158 

Deductions  from  income: 

Interest  on  bond  and  mortgage  payable $  9,000 

Interest  on  notes  payable   3,ooo 

Cash   discount  on   sales 2,389 

Rent,  New  York  office   4,000 

Taxes 3,379 

Insurance 3,184 

Total  deductions  from  income .$  24,952 

Net  income  from  sources  other  than  operation 16,^94 

Total  income  from  all  sources — ^profit  and  loss  $  89,470 

Profit  and  loss  charges: 

Provision  for  depreciation  of  plant  and  equipment $  20,220 

Provision  for  bad  debts 1^270 

Total  profit  and  loss  charges  ^ $  21,490 

Profit  and  loss  for  the  period  „.$  67,980 

Proprietorship  beginning  of  period,  as  adjusted  2,280,154 

Proprietorship — ^June  30,  1912 — per  schedule  No.  i ^$2,348,134 

EXHIBIT   "B"  =^ 

55 


Elementary  Accounting  Problems 

JAMES   WINSTON 
Schedule  showing  adjustment  of  partners'  accounts 

F.  H.  T.  E. 

Total     J.  Winston  Northrup  Ames 

Proprietorship— Dec.  31,  191 1- ••  .$2,498,654    $2,248,654    $150,000  $100,000 
Add    profit,    six    months     ended 

June  30,  1912 67,980           33,990        20,394  I3,596 

Total $2,566,634    $2,282,644    $170,394    $113,596 

Deduct  withdrawals 218,500         212,500         3,000         3,000 

Balance  $2,348,134    $2,070,144    $167,394    $110,596 

Adjustment  of  interest 5,850  3,750  2,100 

Proprietorship— June  30,   1912... $2,348, 134    $2,075,994    $163,644    $108,496 
EXHIBIT   ''B"— SCHEDULE   NO.   i 


JAMES   WINSTON 
General  Balance  Sheet — June  30,  1912 


Assets 


Liabilities  and  Capital 


Land,   buildings   and   equip 
ment $800,862 

Machinery  and  tools $281,427 

Auto  trucks $  25,000 

Furniture  and  fixtures $  12,000 

Working  and  trading  assets 

Materials  and  supplies. .  .$164,924 

Goods  in  process 75,826 

Finished  goods 63,926 

Total  working  and  trad- 
ing assets $304,676 

Current  assets : 

Cash  $  41,073 

Accounts  receivable 142,942 

Notes   receivable 40,000 


Bond  and  mortgage  payable.$300,ooo 

Current  liabilities: 

Taxes  accrued $  3,379 

Wages  accrued 348 

Accounts  payable 80,157 

Notes   payable 50,000 

Interest  accrued  on  bond 

and  mortgage  payable..  9,000 
Interest  accrued  on  notes 

payable 3,000 

Total  current  liabilities..$i45,884 

Reserves 

Appreciation  of  land $  25,000 

Depreciation  buildings, 

equipment,    etc 335,970 

Bad  debts 1,270 

Total  reserves $362,240 


56 


Problem  Number  Six 


Total  current  assets. . .  .$  224,015 


Goodwill $1,500,000 


Deferred  charges   to   ex- 
pense : 

Insurance   premiums   un- 
expired    ..$ 

Advertising  unexpired... 


782 
7,496 


Total  deferred  charges 
to  expense $       8,278 


Total  assets $3,156,258 


Proprietorship : 

J.  Winston $2,075,994 

F.  H,  Northrup      163,644 
T.E.Ames....      108,496 


Total  proprietorship $2,348,134 


Total  liabilities  and  capital.. $3, 156,258 
EXHIBIT  "A" 


Problem  No.  6- A  (Practice)^ 


The  following  is  a  trial  balance  of  the  general  ledger  of 
Frederick  H.  Rowan,  June  30,  1912,  before  closing: 


Debits 

Labor   $  136,250 

Insurance    2,720 

Commissions  to  salesmen..  4,986 
Land,  buildings  and  equip- 
ment      638,576 

Auto  trucks   20,000 

Sales  returns   2,1 17 

Advertising    20,162 

Interest  on  notes  payable..  327 

Bad  debts— written  off 1,000 

Insurance  unexpired   428 

Machinery  and  tools  395,ooo 

Cash    45,247 

Trade  discount  on  sales....  4,927 

Outward  freight  3,159 

Interest  on  b.  &  m.  payable  7,500 

Factory    expense    9,276 

Manufacturing   supplies 784 

Salaries  of  clerks — N.  Y...  5,432 

Furniture  and  fixtures  17,000 

Finished     goods — inventory 

12/31/11 48,694 

Advertising  unexpired   4,027 

Goods     in     process — inven- 
tory 12/31/11   88,847 

Gross  purchases   250,862 

Traveling      expense — sales- 
men       7,877 

General  expense — N.  Y 4,285 

Taxes     3,874 

Salaries  pf  salesmen 17,926 


Credits 

Purchase  allowances  $  251 

Gross  sales  637,982 

Reserve  for  depreciation  of 

buildings  and  equipment.  274,175 
Interest    accrued    on    bond 

and  mortgage  payable . . .  3,250 

Frederick  H.  Rowan,  capital  733,133 

Cash  discount  on  purchases  7,426 

Bond  and  mortgage  payable  300,000 

Purchase  returns   578 

Rent  of  factory  sheds 386 

Taxes  accrued    3,874 

Interest    accrued    on    notes 

payable     2,572 

Accounts  payable  87,498 

Trade     discount     on     pur- 
chases       7,427 

Interest  on  bank  balances . .  487 

Wages  accrued  375 

Notes  payable   65,000 

Interest    on    notes    receiv- 
able       241 


57 


Elementary  Accounting  Problems 
{Debits  continued)  {Credits  continued"^ 

Materials  and  supplies,  in- 
ventory 12/31/11 139,987 

Notes  receivable  45,000 

Sales  allowances  2,544 

Office  expense — N.  Y 1,621 

Cash  discount  on  sales 3,988                                                 _ 

Accounts   receivable    177,928                                                 ~~ 

Superintendence    8,000 

Repairs  to   machinery    125 

Heat,  light  and  power — fac- 
tory       1,425 

Office  salaries,  factory 2,754 

Total  debits  $2,124,655  Total  credits   $2,124,655 

The  inventories  June  30,  1912,  were:  materials  and  sup- 
plies, $145,782;  goods  in  process,  $64,927;  finished  goods, 
$68,928. 

As  of  January  i,  191 2,  Rowan  took  into  partnership,  J.  T. 
Bergen,  giving  him  an  interest  of  $300,000.  Bergen  paid  in  as 
of  January  ist,  $200,000,  which  was  immediately  drawn  out  by 
Rowan.  According  to  the  agreement,  the  buildings,  machinery 
and  tools  were  to  be  depreciated  at  the  rate  of  10%'  per  annum 
beginning  with  the  date  of  the  copartnership.  The  partners 
were  to  be  credited  with  interest  on  their  respective  investments, 
or  charged  with  interest  on  the  deficiency  at  the  rate  of  6%.  No 
adjustments  for  capital,  depreciation,  or  interest  have  been  made 
on  the  books.    Land  $70,000. 

From  the  foregoing  prepare : 

(a)  General  balance  sheet — ^June  30,  191 2. 

{b)  Statement  of  income  and  profit  and  loss  for  the  six 
months  ended  June  30,  1912. 


58 


Problem  Number  Seven 

PROBLEM  No.  7 
Demonstration" 

Murray  Hemmingway,  a  retail  dealer  in  art  objects,  began 
business  on  January  i,  191 1,  with  a  cash  capital  of  $10,000.  He 
engaged  a  store  on  Broadway,  agreeing  to  pay  therefor  $500  a 
month,  in  advance.  According  to  the  terms  of  the  lease  he  was 
to  have  the  rent  for  two  months  free  of  charge  with  the  under- 
standing that  the  matter  was  to  be  adjusted  through  a  rebate  at 
the  end  of  the  year.  He  purchased  furniture  and  fixtures  on 
account  for  $7,000  and  borrowed  from  a  bank  on  January  i, 
191 1,  $50,000,  through  two  notes,  one  of  $30,000  and  one  of 
$20,000,  each  bearing  interest  at  5%  (360  day  basis).  The  note 
for  $30,000  was  due  May  i,  191 1,  and  that  for  $20,000  was 
due  August  I,  191 1.  The  purchases  for  the  period  were  $40,000, 
The  items  of  expense  which  follow  were  all  paid  in  cash:  light, 
$1,200;  salesmen,  $3,750;  porter  (in  store),  $360;  bookkeeper 
and  clerk,  $900;  office  expense,  $125;  sundry  store  expense, 
$300.  Hemmingway  drew  in  cash,  as  salary,  $6,000.  The  rent 
was  paid  to  A.  Kupper,  landlord,  as  per  the  agreement,  that  for 
the  month  of  July  being  paid  on  June  30th.  The  sales  for  the 
period  were  $75,000.  The  allowances  on  sales  were  $325.  The 
cash  discount  on  sales  was  $565.  The  purchase  returns  were 
$1,000.  The  delivery  charges  on  sales,  paid  in  cash,  were  $875. 
The  interest  on  bank  balances  was  $250.  Two  notes,  bearing 
interest  at  6%  and  due  August  i,  each  in  the  amount  of  $5,000, 
were  taken  from  customers  on  June  1st.  The  inventory  of  mer- 
chandise on  June  30th  was  $10,000.  There  was  due  from  custo- 
mers  $32,000  and  due  to  creditors  $25,000.  The  notes  payable 
were  taken  care  of  as  they  matured. 

Prior  to  June  30,  191 1,  Hemmingway  began  negotiations  with 
M.  Blauvelt,  whereby  the  latter  was  to  purchase  a  one-half  inter- 
est in  the  business  for  $26,950.  The  negotiations  were  concluded 
and  the  copartnership  effected  as  of  July  i,  191 1,  not,  however, 
until  Hemmingway  had  valued  and  placed  on  his  books  an  ac- 
count for  goodwill  in  the  amount  of  $15,000.     Blauvelt  gave 

59 


Elementary  Accounting  Problems 

Hemmingway  a  check  for  $26,950,  which  was  not  deposited  in 
Hemmingway's  business  account. 

Frame  the  journal  entries  necessary  to 
(o)   Close  the  books  of  Murray  Hemmingway. 
{h)  Open  the  books  of  Hemmingway  &  Blauvelt.     (Explain 
the  entry  or  entries.)     (Provide  for  a  controlling  account 
in  the  case  of  accounts  receivable.) 

Solution  to  Problem  No.  7 

The  solution  to  this  problem  involves  two  sets  of  books. 
Those  of  Hemmingway  &  Blauvelt  are  to  be  opened.  The 
books  of  Murray  Hemmingway  are  to  be  closed.  Before  either 
operation  can  be  accomplished  it  is  necessary  to  determine  the 
financial  status  of  the  business  in  which  an  interest  was  sold. 

This  type  of  problem  illustrates  the  formation  of  a  copartner- 
ship through  the  sale  of  an  interest  in  a  going  concern.  The 
extent  of  the  interest  is  not  apparent  on  the  face  of  the  problem 
and  must  be  ascertained. 

The  financial  condition  showing  what  was  available  for  sale 
will  be  revealed  by  a  balance  sheet.  A  balance  sheet  cannot  be 
prepared  until  a  trial  balance  has  been  constructed.  A  trial  bal- 
ance cannot  be  made  until  the  accounts  have  been  raised.  Ac- 
counts proceed  from  journal  entries.  Hence  the  sequence  of 
operations  begins  with  the  journal  entries  taking  up  the  items 
in  the  order  in  which  they  appear  in  the  problem.  It  is  to  be 
understood  that  while  some  of  the  transactions  involve  cash, 
and  the  entries  would  be  made  in  the  cash  book,  they  may  very 
properly  be  expressed  in  the  form  of  journal  entries.  The  facts 
will  bear  scrutiny  to  determine  which  should  be  journalized  and 
which  are  given  for  explanatory  purposes  only.  The  journal 
entries  follow: 

Cash    $10,000 

To  Murray  Hemmingway,  proprietor    $10,000 

Furniture  and  fixtures   7,000 

To   accounts   payable 7,000 

Cash 50,000 

To  notes  payable   50,000 


Note  due  May  i,  191 1,  $30,000 — 5% 
"      "     Aug.  I,  1911,  $20,000—5% 


60 


Problem  Number  Seven 

Purchases $40,000 

To  accounts  payable $40,000 

Light 1,200 

Salaries  of  salesmen     3,750 

Wages  of  porter    360 

Salary  bookkeeper  and  clerk  900 

Office  expense 125 

Sundry  store  expense 300 

M.  Hemmingway,  salary 6,000 

To    cash 12,63s 

Rent 3.000 

Rent  paid  in  advance 500 

To    cash 3,500 

Customers 75,000 

To   sales 7S,ooo 

Sales    allowances    325 

Cash  discount  on  sales  565 

To    customers 890 

Accounts    payable 1,000 

To   purchase   returns    ...^ 1,000 

Delivery   charges 875 

To  cash   875 

Cash    250 

To    interest   on   bank   balances    250 

Notes  receivable 10,000 

To   customers    10,000 

Two  notes,  $5,000  each  dated  June  i,  191 1,  bearing 
interest  at  6%,  due  August  i,  191 1. 

Accrued  interest  on  notes  receivable 50 

To  mterest  on  notes  receivable -<. 50 

$10,000  X  6%  =  $600  -i-  12  =  $50. 

Inventory    (new) 10,000 

Customers    (new) 32,000 

Accounts  payable  (old)    25,000 

To  purchases 10,000 

Customers    (old)    32,000 

Accounts  payable    (new) 25,000 

Cash 32,110 

To   customers 32,110 

Accounts  payable 21,000 

To  cash   21,000 

Interest  on  notes  payable 1,000 

To  interest  accrued  on  notes  payable 1,000 

$30,000  X  5%  =  $1,500  -^-  12  X  4  =  $  500 
$20,000  X  5%  =  $1,000  -^2         =500 

$1,000 
61 


Elementary  Accounting  Problems 

Notes  payable 30,000 

Interest  accrued  on  notes  payable  500 

To  cash   30,500 

Goodwill 15,000 

To  Murray  Hemmingway,  proprietor    15,000 

In  addition  to  the  above  there  is  one  entry  which  seems  to 
require  explanation.  It  will  be  remembered  that  according 
to  the  terms  of  the  lease,  Hemmingway  was  to  have  the  use  of 
the  premises  for  two  months  free  of  charge.  The  agreement 
was  modified,  however,  in  that  the  adjustment  was  to  be  made 
through  a  rebate  at  the  end  of  the  year.  This  being  the  case,  it 
is  probable  that  the  adjustment  would  be  accomplished  so  far  as 
Hemmingway  was  concerned  by  not  paying  any  rent  for  the 
months  of  November  and  December,  191 1.  Such  is  the  practice 
frequently  met  with  in  similar  cases.  Thus,  when  Hemmingway 
completed  negotiations  with  Blauvelt  for  the  sale  of  an  interest 
in  the  business,  there  existed  a  right,  owned  by  Hemmingway, 
to  recover  from  A.  Kupper,  the  landlord,  the  amount  of  $1,000. 
This  right,  of  which  Hemmingway  had  not  availed  himself,  would 
have  the  effect  of  reducing  the  rent,  not  for  the  year,  but  for  the 
first  six  months  and  would  thereby  create  an  asset  in  the  form 
of  an  account  collectible  from  A.  Kupper.  It  would  thus  appear, 
that  in  the  circumstances  an  entry  should  be  made  previous  to 
closing  which  would  be  as  follows : 

A.  Kupper,  landlord    $1,000 

To   rent $1,000 

If  at  this  point  all  of  the  above  journal  entries  were  to  be 
posted  to  skeleton  ledger  accounts  a  trial  balance  would  show 
the  following  accounts  and  amounts.  Further  a  classification  of 
the  accounts  into  real  and  nominal  groups  would  reveal  a  profit 
for  the  period  of  $28,900  which  should  be  closed  into  the  pro- 
prietor's account  by  journal  entry. 

Debits 

Furniture   and   fixtures    $ 

Light     

Salaries   of   salesmen    

Wages  of  porter    , 

Salary  bookkeeper  and  clerk  . . 

Office  expense   , 

Sundry  store  expense   , 

M.  Hemmingway,  salary   6,000 

Rent 

Rent  paid  in  advance 500  500 

Sales  allowances   325  325 

62 


Trial 

Income  debits 

Balance 

balance 

and  credits 

Sheet  items 

\    7,000 

$  7,000 

1,200 

$  1,200 

3,750 

3,750 

360 

360 

900 

900 

125 

125 

300 

300 

6,000 

6,000 

2,000 

2,000 

Problem  Number  Seven 

Cash  discount  on  sales  565                    565 

Delivery   charges 875                      875 

Accrued  interest  on  notes  receivable  50                                                  50 

Inventory    (new)    10,000                                            10,000 

Interest  on  notes  payable 1,000                   1,000 

Goodwill    15,000                                            15,000 

Cash    23,850                                           23,850 

Purchases 30,000                 30,000 

Customers     32,000                                           32,000 

Notes  receivable  10,000                                            10,000 

A.    Kupper    ^ 1,000                                              1,000 

Profit  and  loss   28,900                 28,900 

Total  $175,700 

Credits 

Sales    - $  75,000 

Purchase   returns    1,000 

Interest  on  bank  balances  250 

Interest  on  notes  receivable  ........  50 

Accounts  payable    25,000 

Notes  payable    20,000 

Interest  accrued  on  notes  payable..  500 

}A.  Hemmingway,  proprietor   53,900 

Total  $175,700 


$76,300 

$99,400 

$75,000 

1,000 

250 

50 

$25,000 

20,000 

500 

53,900 

$76,300 

$99,400 

At  this  point  it  becomes  possible  to  comply  with  the  require- 
ments of  the  problem  and  frame,  first,  the  journal  entries  nec- 
essary to  close  the  books  of  Murray  Hemmingway  in  accordance 
with  the  terms  of  the  sale.  Two  entries  are  made  instead  of 
one  in  order  to  show  that  the  business  was  taken  over  and  con- 
tinued by  Hemmingway  &  Blauvelt. 

Hemmingway  &  Blauvelt $53,900 

Accounts   payable 25,000 

Notes   payable    20,000 

Interest  accrued  on  notes  payable - 500 

To  Furniture  and  fixtures $  7,000 

Merchandise    (inventory)    10,000 

Cash    23,850 

Accounts  receivable  33,5oo 

Notes  receivable   10,000 

Accrued  interest  on  notes  receivable 50 

tioodwill    .-. 15,000 

To  close  asset  and  liability  accounts 
to   new  proprietors*  accounts. 

Murray  Hemmingway,  proprietor    $53,900 

To  Hemmingway  &  Blauvelt $53,900 

To  close  old  proprietor's  accounts. 
The  second  requirement  of  the  problem  covers  the  opening 
of  the  books  of  Hemmingway  &  Blauvelt  and  is  fulfilled  by  the 
following  entry: 

63 


Elementary  Accounting  Problems 

Furniture  and  fixtures   $  7,(X)0 

Merchandise    (inventory)    10,000 

Cash    23,850 

Accounts  receivable   33,500 

Notes  receivable   10,000 

Accrued  interest  on  notes  receivable   50 

Goodwill 15,000 

To  Accounts  payable $25,000 

Notes  payable    20,000 

Interest  accrued  on  notes  payable 500 

M.  Hemmingway,  proprietor   26,950 

M.  Blauvelt,  proprietor   26,950 

To  set  up  on  the  books,  the  accounts  repre- 
senting the  business  of  Hemmingway  & 
Blauvelt,  as  taken  over  from  Murray 
Hemmingway  under  an  agreement  of  co- 
partnership dated  July  i,  191 1. 


Probi^dm  7-A  (Practice) 

From  the  following  trial  balance  at  June  30,  191 1,  and  sup- 
plementary information,  frame  the  entries  to  close  the  books  of 
John  Simmonds  and  open  those  of  Ralph  &  Simmonds  in  the 
case  of  a  copartnership  agreement  in  which  Franklin  Ralph 
purchases  a  half  interest  in  the  business  of  John  Simmonds, 
under  date  of  July  i,  191 1,  for  $43,000: 

Debits  Credits 

Advertising     $    5,000      Sales     $  95,000 

Horse,  wagon  and  harness.       1,200      John   Simmonds    60,034 

Rent    1,500      Salaries    accrued    50 

Furniture  and  fixtures 10,000      Rent    60 

Bad  debts-written  off 3,500      Notes  payable   5,000 

Cash     25,162      Purchase    allowances    240 

Salaries  of  clerks    2,500      Interest    accrued    on    notes 

Accrued    interest    on    notes  payable     175 

receivable    275      Interest  on  notes  receivable         275 

Commissions    7,000      Commission  accrued   400 

Merchandise    12/31/10 12,000      Accounts  payable   12,473 

Interest  on  notes  payable..         350      Purchase  returns   180 

Accounts  receivable  35,700      Reserve  for  bad  debts 3,500 

Sales  allowances  750 

Rent  paid  in  advance 250 

Sales  returns   200 

Notes  receivable  10,000 

Insurance    300 

Purchases    60,000 

Office  expense   1,700 


Total  debits   $177,387  Total  credits   $177,387 


Inventory — merchandise — June  30,  191 1 — $16,000.  Value  of 
goodwill  $10,000.  Unexpired  insurance  $50.  Reserve  for  bad 
debts  to  be  increased  1%  of  accounts  receivable.  The  cash  paid 
by  Ralph  to  Simmonds  was  not  involved  in  the  accounts. 

64 


Problem  Number  Eight 

PROBLEM  No.  8 
Demonstration 

According  to  the  terms  of  the  copartnership  agreement  en- 
tered into  on  July  i,  191 1,  by  M.  Hemmingway  &  M.  Blauvelt, 
Hemmingway  was  to  have  the  active  management  of  the  busi- 
ness and  to  receive  a  salary  of  $5,000  per  annum.  Drawings 
were  to  be  permitted  and  charged  in  the  case  of  each  partner 
to  a  drawing  account.  Interest,  computed  on  the  capital  invest- 
ment at  the  rate  of  6%  per  annum  was  to  be  credited  to  the 
respective  drawing  accounts. 

A  trial  balance  of  the  general  ledger  at  the  beginning  of  busi- 
ness July  I,  191 1,  embraced  the  following  accounts:  Debits:  fur- 
niture and  fixtures,  $7,000;  merchandise,  $10,000;  cash,  $23,850; 
accounts  receivable,  $33,500;  notes  receivable,  $10,000;  accrued 
interest  on  notes  receivable,  $50;  goodwill  $15,000.  Credits  were: 
accounts  payable,  $25,000;  notes  payable,  $20,000;  interest  ac- 
crued on  notes  payable,  $500 ;  M.  Hemmingway,  capital,  $26,950 ; 
M.  Blauvelt,  capital,  $26,950. 

The  transactions  during  the  six  months  ended  December  31, 
191 1,  aside  from  those  indicated  by  the  text  above,  comprised 
the  following: 

Debits  to  merchandise,  $161,324;  credits  to  merchandise,  $207,- 
310;  credits  to  accounts  payable  for  purchases,  $155,156;  light, 
$1,500;  sundry  store  expense,  $378;  debits  to  accounts  payable 
$176,091;  debits  to  accounts  receivable  $192,143;  credits  to  ac- 
counts receivable,  $183,496.  The  cash  receipts  were  $10,100, 
for  notes  receivable  and  interest  and  $175,828  from  customers. 
The  cash  disbursements  were:  Hemmingway,  $6,000;  Blauvelt, 
$10,000;  creditors,  $160,924;  rent  payable,  $1,500;  notes  pay- 
able and  interest,  $20,538,33;  salaries  of  salesmen,  $4,000;  wages 
of  porter,  $360;  advertising,  $2,500;  commission  $450;  salary 
of  bookkeeper  and  clerk,  $1,000;  office  expense,  $527. 

Upon  analysis  the  merchandise  account  was  found  to  con- 
tain the  following: 

Antique  furniture:  Inventory,  July  i,  191 1,  $5,000;  purchases, 

65 


Elementary  Accoimiing  Problems 

$50,000;  inward  freight,  $1,127;  sales  returns,  $1,512;  delivery 
expense,  $544;  rebates  and  allowances,  $222;  purchase  returns, 
$2,000;  trade  discount  on  purchases,  $4,827;  inventory,  Decem- 
ber 31,  191 1,  $6,732;  sales,  $53,815.20. 

Paintings  and  tapestries:  Inventory,  July  i,  191 1,  $3,000;  pur- 
chases, $70,000;  inward  freight,  $1,465;  sales  returns  $2,199;  de- 
livery expense,  %y2y ;  rebates  and  allowances,  $295 ;  purchase  re- 
turns, $500;  purchase  allowances,  $50;  trade  discount  on  pur- 
chases, $6,431;  inventory,  December  31,  191 1,  $7,894;  sales  $94,- 
216.50. 

Statuary  and  carvings:  Inventory,  July  i,  191 1,  $1,500;  pur- 
chases, $20,000;  inward  freight,  $472;  sales  returns,  $1,672;  de- 
livery expense,  $532 ;  rebates  and  allowances,  $100 ;  purchase  re- 
turns, $100;  trade  discount  on  purchases,  $1,232;  inventory,  De- 
cember 31,  1911,  $3,987;  sales,  $30,331.20. 

Miscellaneous:  Inventory,  July  i,  191 1,  $500;  purchases, 
$10,000;  inward  freight,  $263;  sales  returns,  $45;  delivery  ex- 
pense, $26;  rebates  and  allowances,  $123;  purchase  returns,  $20; 
trade  discount  on  purchases,  $7;  inventory,  December  31,  191 1, 
$299;  sales,  $13,780.10. 

From  the  foregoing  prepare: 

(a)   General  balance  sheet,  December  31,  191 1 
{b)  Statement   of   income   and   profit   and   loss    for   the 
six  months  ended  December  31,  191 1,  supported  by 
a  schedule  showing  the  gross  profit  according  to  the 
diflferent  classes  of  goods. 


S01.UT10N  TO  Proble:m  No.  8 

The  procedure  necessary  to  the  solution  consists,  first,  in 
setting  up  the  trial  balance  as  at  the  beginning  of  business  July 
I,  191 1 ;  second,  in  making  and  posting  the  adjusting  entries 
representing  the  transactions  for  the  six  months  ended  Decem- 
ber 31,  191 1 ;  third,  in  completing  the  working  sheet;  and 
fourth,  in  preparing  the  statements  required. 

The  sequence  of  operations  is  somewhat  difficult  to  show 
unless  the  demonstrator  has  the  visual  attention  of  the  student. 
It  will  be  more  apparent,  perhaps,  in  this  case  if  the  journal  en- 

66 


Problem  Number  Eis:ht 


ii' 


tries  are  framed  before  any  part  of  the  working  sheet  is  con- 
structed. 

The  problem  is  purposely  somewhat  vague.  The  solution 
involves  in  places  a  violation  of  the  principle  that  any  prob- 
lem, as  well  as  its  solution,  should  be  complete  in  itself  and  not 
require  reference  to  preceding  problems.  The  connection  in 
this  case  is  so  apparent,  however,  than  rather  than  cause  annoy- 
ance it  will  probably  stimulate  an  interest  in  investigation  with 
which  the  accountant  has  so  frequently  to  deal. 

Following  the  text  of  the  problem  it  will  be  seen  that  Hem- 
mingway  is  to  receive  a  salary  of  $5,000  per  annum  as  manager. 
This  is  presumably  due  to  the  fact  that  Blauvelt  will  give  little 
time,  if  any,  to  the  business.  The  salary  allowed  Hemmingway 
tends  to  equalize  the  standing  of  the  partners,  since  it  would  be 
inequitable  for  Hemmingway  to  give  his  entire  time  to  the 
business  and  receive  as  his  compensation  only  one-half  of  the 
profits.  Nothing  is  said  as  to  the  division  of  profits  but  the 
rule  in  such  cases  is  that  partners  shall  participate  in  the  profits 
and  be  charged  with  the  losses  equally. 

The  journal  entry  covering  the  salary  of  Hemmingway  would 
be  as  follows: 

Salary  of  manager $2,500.00 

To  M.  Hemmingway,  drawing  account  $2,500.00 

It  will  be  noted  also  that  interest,  computed  on  the  capital 
investment  at  the  rate  of  six  per  cent  per  annum  is  to  be 
credited  to  the  respective  drawing  accounts  of  the  partners. 
Hence  the  following: 

Interest  on  capital  $1,617.00 

To  M.  Hemmingway,  drawing  account $  808.50 

M.  Blauvelt,  drawing  account   808.50 

For  six  months'  interest  at  6  per  cent  on  the 
capital  investment  of  $53,900  standing  to  the 
credit  of  M,  Hemmingway  and  M.  Blauvelt  in 
equal  amounts. 

It  is  perhaps  pertinent  at  this  point  to  discuss  not  only  the 
propriety  but  the  necessity  of  charging  and  crediting  interest.  It 
is   far   from   necessary  and   while  not  perhaps   improper  is  a 

67 


Elementary  Accounting  Problems 

waste  of  time  and  energy  with  nothing  gained  in  the  end.  Hem- 
mingway  and  Blauvelt  have  equal  amounts  of  capital  invested  in 
the  business  and  share  equally  in  the  profits  and  losses.  To 
charge  and  credit  interest  in  this  case  would  have  the  effect  of 
charging  profit  and  loss  with  $1,617  ^^^  crediting  each  part- 
ner with  $808.50.  Profit  and  loss  would  subsequently  be  closed 
out  to  the  partners'  accounts  and  each  would  be  charged  with 
$808.50,  thereby  nullifying  the  first  entry.  It  is  difficult  to  see 
what  would  have  been  accomplished  by  such  procedure. 

As  a  general  proposition  it  is  contrary  to  the  economic  theory 
on  which  good  accounting  is  based  to  charge  the  accounts  of  the 
business  with  interest  on  capital,  since  capital  is  invested  in 
and  not  lent  to  the  business,  and  receives  as  its  share  in  the  dis- 
tribution the  profit  which  results  from  its  employment  in  the 
enterprise.  Where  there  are  unequal  investments  of  capital  it  is 
usual,  however,  to  employ  this  expedient  of  adjusting  the  ac- 
counts of  partners.  It  would  doubtless  be  better  where  there 
are  unequal  investments  of  capital  among  partners,  unless  the  co- 
partnership agreement  specifies  that  interest  shall  be  charged,  to 
refrain  from  making  any  interest  entries  in  the  operating  accounts 
and  adjust  inequalities  of  investment  among  partners  in  the 
partners'  accounts. 

The  matter  of  rent  requires  some  explanation  since  it  is 
connected  with  the  preceding  problem.  Under  the  terms  of  the 
lease,  the  rent  was  to  be  $500  a  month.  The  agreement  was 
modified,  however,  by  the  stipulation  that  Hemmingway  was  to 
enjoy  two  months*  rent  free.  In  so  far  as  the  copartnership 
is  concerned  the  matter  of  rent  was  adjusted  at  the  time  of  the 
formation  of  the  copartnership.  It  will  be  remembered  that 
there  were  among  the  accounts  receivable  of  $33,500  at  June  30, 
191 1,  two  items,  amounting  respectively  to  $1,000  and  $500  repre- 
senting in  the  first  instance  an  amount  due  from  A.  Kupper  for 
the  rent  rebate  and  in  the  second  instance  the  rent  for  July  paid 
in  advance.  On  the  books  of  the  copartnership  the  rent  for  the 
six  months  ended  December  31,  191 1,  would  be  covered  by  a 
charge  to  rent  and  a  credit  to  rent  payable  in  the  amount  of 
$3,000.  In  settlement  of  this  liability  there  would  be  applied  the 
amount  of  $1,500  above  mentioned.  The  balance  would  have  to 
be  paid  in  cash.  This  explanation  assumes,  of  course,  that  the 
rent  for  January,  191 2,  was  not  paid  in  advance  and  the  period 

68 


Problem  Number  Eight 

of  six  months  from  July  i  to  December  31,  191 1,  was  treated 
as  a  whole  without  regard  to  any  variations  which  might  have 
developed  through  the  payment  of  the  rent  from  month  to  month. 
The  journal  entries  based  on  the  above  follow: 

Rent     $3,000.00 

To  rent    payable    $3,000.00 

For  rent  for  six  months  ended  December  31,  1911, 

Rent  payable    $3,000 

To  accounts  receivable    $1,500.00 

Cash     1,500.00 

For  accounts  due  from  A.  Kupper  landlord  and 
cash  applied  in  settlement  of  rent  as  above. 

The  other  entries  which  are  related  to  the  preceding  problem 
are  those  having  to  do  with  the  accrual  of  interest  on  notes  receiv- 
able and  notes  payable.  The  interest  in  the  case  of  the  former  as 
accrued  to  June  30,  191 1,  amounted  to  $50.  As  the  notes  were 
due  and  paid  on  August  i,  191 1,  it  would  be  necessary  to  accrue 
the  interest  to  that  date,  which  would  require  a  charge  and  credit 
of  $50  more,  viz.: 

Accrued  interest  on  notes  receivable  $50.00 

To  interest  on  notes  receivable  $50.00 

The  note  payable  in  the  amount  of  $20,000,  which  was  out- 
standing June  30,  191 1,  was  due  and  paid  August  i,  191 1.  The 
interest  was  accrued  to  June  30th  and  amounted  to  $500.  There- 
fore an  accrual  of  one  month's  interest  is  required  on  this  note 
and  is  as  follows: 

Interest  on  notes  payable  $83.33 

To  interest  accrued  on  notes  payable  $83.33 

The  following  journal  entries  are  developed  from  the  trans- 
actions contained  in  the  text  of  the  problem: 

Merchandise     $161,324.00 

Light    1,500.00 

Sundry  store  expense    378.00 

Accounts    payable    15,167.00 

Accounts   receivable    192,143.00 

69 


Elementary  Accounting  Problems 

To  merchandise     $207,310.00 

Accounts   payable    157,034.00 

Accounts   receivable    6,168.00 

Cash     $185,928.00 

To  notes   receivable    $  10,000.00 

Accrued  interest  on  notes  receivable...  100.00 

Accounts   receivable    175,828.00 

M.  Hemmingway,  drawing  account .$    6,000.00 

M.  Blauvelt,  drawing  account   10,000.00 

Accounts    payable    160,924.00 

Notes  payable  20,000.00 

Interest  accrued  on  notes  payable  583.33 

Salaries  of  salesmen  4,000.00 

Wages  of  porter 360.00 

Advertising    2,500.00 

Commission 450.00 

Salary  of  bookkeeper  and  clerk  1,000.00 

Office   expense    527.00 

To  cash $206,344.33 

All  of  the  above  entries  should  now  be  posted  to  the  ad- 
justment columns  of  the  working  sheet  which  will  have  been 
constructed  with  the  trial  balance  of  July  i,  as  the  basic  factor. 


70 


Problem  Number  Eight 

Trial  Balance  Adjustments  Balance       Profit  and 

July  1, 1911       Debits  Credits        Sheet  Items    Loss  Items 

DSBITS 

Furniture  and  fixtures    $  7,000.00  $  7,000.00 

Merchandise      10.000.00  $161,324.00    ($  18,912.00)  t$54,898.00 

(   207,310.00) 

Cash      23,850.00      185,928.00    (206,344.33)        1,933.67 

(        1,500.00) 
(        6,168.00) 

Accounts    receirable     33,500.00     192,143.00   (        1,500.00)      42,147.00 

(   175,828.00) 

Notes    receivable    10,000.00  10,000.00 

Accrued  interest  on  notes  receivable 50.00  50.00  100.00 

Goodwill     15,000.00  15,000.00 

$99,400.00 

Salary  of  msr^ger    T.  2,500.00  2,500.00 

Interest   on   capital    1,617.00  1,617.00 

Rent     3,000.00  3,000.00 

Light      1,500.00  1,500.00 

Sundry  store  expense    378.00  378.00 

Interest  on  notes  payable    83.33  83.33 

Salaries    of   salesmen    4,000.00  4,000.00 

Wages   of  porter    360.00  360.00 

Advertising      2,500.00  2,500.00 

Commission     450.00  450.00 

Salary  of  bookkeeper  and  clerk   1,000.00  1,000.00 

Ofllce    expense     527.00  527.00 

Merchandise — inventory     (new)     18.912.00                                 18,912.00 


$84,992.67  t$36,982.67 


CREDITS 

Accounts    payable    $25,000.00  (  160,924.00)      157,034.00     $  5,943.00 

*T  *  ^,  (    15,167.00) 

Notes    payable    20,000.00       20.000.00 

Interest  accrued  on  notes  payable 500.00  583.33  83.33 

M.  Hemmingway,   capital    26,950.00  18,516.33       45,466.33 

M.   Blauvelt,   capital    26,950.00  18,516.34       45,466.34 


$99,400.00 


%,     rr          ,                  .  (            808.50) 

M.   Hemmingway,    drawing   account 6,000.00   (       2,500.00)  *    2,691.50 

M.  aiauvelt    drawing  account 10,000.00               808.50    ♦    9,191.50 

Rent   payable 3.000.00           3,000.00 

Interest  on   notes   receivable    50.00                            $        50.00 

Profit   and    loss    ''^ ""                           •37.032.67 


$84,992.67    $36,982.67 


t  Credit  item. 
•  Debit  item. 


HEMMINGWAY  &  BLAUVELT 

Qbnbral  Balance  Sheet — December  31,  1911 

ASSETS  LIABILITIES   AND   CAPITAL 

Accounts    payable     $  5,943.00 

rurniture  and  fixtures $  7.000.00  Proprietorship  : 

Goodwill     15,000.00  M.    Hemmingway    $42,774.83 

Merchandise— inventory     18,912.00  M.    Blauvelt    36,274.84     79,049.67 

Cash      1,933.67  

Accounts  receivable 42,147.00 


Total  assets $84,992.67  Total  liabilities  and  capital $84,992.67 

EXHIBIT  "A" 


71 


Elementary  Accounting  Problems 


HEMMINQWAY  &  BLAUVELT 

Statement  of  Income  and  Profit  and  Loss  fob  the  Snc  Months  Endbd 
Decembeb  31,  1911 

Gross  profit  on  sales   (schedule  No.  1) $54,898.00 

Selling  expense : 

Salaries  of  salesmen    $4,000.00 

Commission      450.00 

Advertising      2,500.00 

Light      1,500.00 

Sundry  store  expense    378.00 

Total 8,828.00 

Selling    profit    $46,070.00 

Administrative  expense : 

Salary   of  manager    $2,500.00 

Salary  of  bookkeeper  and  clerk    1,000.00 

Office  expense   527.00 

Wages  of  porter 360.00 

Total 4,387.00 

Net  profit  on  sales — income  from  operations    $41,683.00 

Other  income : 

Interest  on  notes  receivable 50.00 

Total    income    $41,733.00 

Deductions  from  income : 

Interest  on   capital    $1,617.00 

Interest  on  notes  payable 83.33 

Rent      3,000.00 

Total   4,700.38 

Net  income — profit  and  loss  for  the  period $37,032.67 

Proprietorship  beginning  of  period  as  adjusted  (schedule  No.  2) 42,017.00 

Proprietorship — December  31,  1911    .$79,049.67 

EXHIBIT   "B" 


72 


Problem  Number  Eight 

HEMMINGWAY  &  BLAUVELT 

ScHCDULR  Showing  Qboss  Pbofit  on  Sales,  Classified,  for  thb  Six  Months  Endbd 

December  31,  1911 

Antique    Paintings  and  Statuary  and       Mis- 
Total           Furniture  Tapestries  Carvings         cellaneous 

TmRR     «?ales                 $192,143.00      $53,815.20  $94,216.50  $30,331.20      $13,780.10 

L€s»— returns"..*.* 5,428.00          1,512.00          2,199.00  1,672.00  45.00 

Net    sales .$186,715.00     $52,303.20  $92,017.50  $28,659.20     $13,735.10 

Deductions  from  sales : 

Rebates  and  allowances    $        740.00     $      222.00  $      295.00  $      100.00     $      123.00 

Delivery    expense     1,829.00             544.00             727.00  532.00  26.00 

Total    $     2,569.00     $       766.00  $1,022.00  $      632.00     $      149.00 

Income   from    sales    ..$184,146.00     $51,537.20  $90,995.50  $28,027.20     $13,586.10 

Cost  of  goods  sold : 

Gross    purchases     $150,000.00     $50,000.00  $70,000.00  $20,000.00     $10,000.00 

Less — purchase   returns    2,620.00          2,000.00             500.00  100.00  20.00 

Net    purchases    ..$147,380.00     $48,000.00  $69,500.00  $19,900.00     $  9,980.00 

Add— inward    freight     3,327.00          1,127.00          1,465.00  472.00  263.00 

Total    $150,707.00     $49,127.00  $70,965.00  $20,372.00     $10,243.00 

Deductions  from  purchases : 

Purchase    allowances     $  50.00  $        50.00 

Trade    discount    12,497.00     $  4,827.00         6,431.00  $  1,232.00     $  7.00 

Total    ..$  12,547.00     $  4,827.00  $  6,481.00  $  1,232.00     $           7.00 

Cost  of  purchases  sold    ..$138,160.00     $44,300.00  $64,484.00  $19,140.00     $10,236.00 

Add    or    deduct — increase    or    decrease 

in    inventory     8,9U.OO         1,7S2.00         4,89Jf.OO  2,^87.00  201.00 

Total  cost  of  goods  sold $129,248.00     $42,568.00  $59,590.00  $16,653.00     $10,437.00 

©ross  profit  on   sales    ..$  54,898.00     $  8,969.20  $31,405.50  $11,374.20     $  3.149.10 

EXHIBIT  "B" 
SCHEDULE  NO.  1 


HEMMINGWAY  &  BLAUVELT  , 

SCHXDTTLB    SHOWING    ADJUSTMENT    OF    PROPRIETORSHIP    AS    AFFECTED    BY    ENTBIBS 

During  thb   Six  Months   Ended  December  31,   1911 

Total         M.  Hemmingway  M.  Blauvelt 
Proprietorship — July    1,    1911     $53,900.00  $26,950.00  $26,950.00 


Add: 

Interest  on   capital    $1,617.00         $      808.50         $      808.50 

Salary   of  manager    2,500.00  2,500.00 


Total    $4,117.00  $3,308.50  $      808.50 

Total     $58,017.00  $30,258.50  $27,758.50 

Deduct — drawings    16,000.00  6,000.00  10,000.00 

Proprietorship,   as  adjusted    $42,017.00  $24,258.50  $17,758.50 


EXHIBIT    "B" 
SCHEDULE  NO.  2 


73 


Elementary  Accotuiting  Problems 
Problem  No.  8  A  (Practice) 

The  merchandise  accounts  in  the  general  ledger  of  Palmer  & 
Stubbs,  December  31,  191 1,  showed  the  following: 

CLOTHING 

1911  1911 

Dec.    1     Balance    $  8,000.00Dec.  31     Returns    $      300.00 

31     Purchases     30,000.00  Allowances     25.00 

Rebates     and     allow-  Discount    (trade)    .  . .      2,920.00 

ances     45.00  Sales     32,563.20 

Delivery   expense    . . .  300.00 

Inward   freight    586.00 

Returns     450.00 


$39,381.00  $35,808.20 


FURNISHINGS 


1911  1911 

Dec.    1     Balance    $  4,000.00Dec.  31     Sales     $21,662.10 

3:1.     Returns    75.00  Allowances     176.00 

Purchases     17,000.00  Returns     415.00 

Delivery   expense    .  . .         200.00  Trade  discount    1,892.00 

Allowances     22.00 

Inward   freight    232.00 


$21,529.00  $24,145.10 

MISCELLANEOUS    MERCHANDISE 

1911  1911 

Dec.    1     Balance    $  200.00Dec.  31  Returns    $  10.00 

,31     Purchases     900.00  Allowances     5.00 

Inward  freight    15.00  Trade  discount    95.00 

Delivery   expense    . . .           45.00  Sales     885.00 

Allowances     5.00 


$  1,165.00  $      995.00 

The  other  accounts  in  the  ledger  were: 

Debits:  salary  of  manager,  $500;  furniture  and  fixtures 
$10,000;  interest  on  capital,  $500;  cash,  $12,790;  rent,  $600; 
account  receivable,  $18,742.31;  light,  $52;  notes  receivable,  $5,- 
000;  sundry  store  expense,  $75;  accrued  interest  on  notes  re- 
ceivable, $100;  interest  on  notes  payable,  $250;  goodwill,  $5,- 
000;  salaries  of  salesmen,  $325;  wages  of  porter,  $50;  advertis- 
ing, $750;  commission,  $225;  salary  of  bookkeeper  and  clerk, 
$100;  office  expense,  $112;  A.  Palmer,  drawings,  $200;  B. 
Stubbs,  drawings  $1,000. 

Credits:  accounts  payable,  $5,548.01;  notes  payable,  $10,- 
000;  interest  accrued  on  notes  payable,  $250;  A.  Palmer,  cap- 
ital, $20,000;  B.  Stubbs,  capital,  $20,000;  rent  payable,  $600; 
interest  on  notes  receivable,  $100;  A.  Palmer,  drawings,  $750; 
B.  Stubbs,  drawings,  $250. 

74 


Problem  Number  Eight 

The  inventories  at  December  31,   191 1,  were  clothing,  $9,- 
CXX>;   furnishings,  $3,000;   miscellaneous  merchandise,  $250. 
From  the  foregoing  prepare: 

(o)  General  balance  sheet — December  31,  1911. 
{b)   Statement   of   income   and   profit  and  loss   for  the 
month  ended   December  31,    191 1,   supported   by   a 
schedule  showing  the  gross  profit  according  to  the 
different  classes  of  goods. 


75 


Elementary  Accounting  Problems 

PROBLEM  No.  9 
Demonstration 

Plimpton,  Gordon  &  Grey  were  partners  engaged  in  the 
wholesale  cotton  goods  business.  The  respective  investments 
were  $50,000.00,  $30,000.00,  and  $20,000.00.  The  copartnership 
agreement  provided  that  the  partners  should  receive  interest  on 
their  original  investments  at  the  rate  of  6^  per  annum.  Plimp- 
ton drew  $50.00  a  week  as  salary.  Gordon  and  Grey  each  drew 
$40.00  a  week  as  salary.  Partners  were  allowed  to  draw  against 
profits,  irrespective  of  salaries,  but  drawings  were  charged  with 
interest  at  6%.  The  goodwill,  although  not  on  the  books,  was 
estimated  as  worth  $20,000.00.  It  was  a  matter  of  agreement 
among  the  partners  that  in  case  of  dissolution  for  any  cause 
whatever  the  goodwill  should  be  apportioned  in  proportion  to 
their  respective  investments. 

A  trial  balance  of  the  general  ledger,  after  closing,  at  Decem- 
ber 31,  191 1,  was  as  follows:  Land  and  buildings,  ^$72,300;  fur- 
niture and  fixtures,  $3,000;  securities  owned  (stocks),  $10,000; 
merchandise  inventory,  $45,000;  cash,  $12,000;  accounts  receiv- 
able, $37,000;  notes  receivable,  dated  December  15,  i^ii,  due 
February  15,  1912,  interest  5%,  $3,000;  bond  and  mortgage  on 
building  dated  October  i,  1910,  due  October  i,  1913,  interest 
5%,  last  paid  to  October  i,  191 1,  amount  of  mortgage,  $35,000; 
accounts  payable,  $21,070;  notes  payable,  $10,000,  dated  Decem- 
ber I,  1911,  due  February  i,  1912,  interest  5%;  reserve  for  de- 
preciation on  buildings,  s%  per  annum.,  $7,230;  proprietorship — 
Plimpton,  $55,000;  Gordon,  $32,527;  Grey  $21,473.  The  aver- 
age gross  profit  on  cost  for  the  past  three  years  had  been  35%. 

The  transactions  during  January,  1912,  were  as  follows: 
Purchases,  prior  to  and  including  January  17,  $12,000,  subse- 
quent to  January  17,  $18,000;  sales  prior  to  January  17,  $13,500, 
subsequent,  $20,250;  salaries  of  salesmen,  not  paid  until  Febru- 
ary 3,  one  at  $250  a  month,  three  at  $200  each,  two  at  $150  each 
a  month;  expense  funds  forwarded  to  salesmen  January  10, 
$1,500;   expenses    for   the   month   reported   by    salesmen   were 

*  Land  $20,000.00. 

76 


Problem  Number  Nine 

found  upon  analysis  to  be,  prior  to  January  17,  $510,  subsequent, 
$420;  advertising,  bills  contracted  prior  to  January  17,  $90,  of 
which  space  corresponding  to  $50  was  used  prior  to  January 
17,  and  $40  was  not  used  during  the  month;  office  salaries  per 
week,  exclusive  of  partners,  $174,  paid  in  cash  at  the  end  of  each 
week*;  general  expense,  prior  to  January  17,  $125,  subsequent, 
$450;  drawings — Plimpton,  January  15,  $200;  Gordon,  January 
17,  $500;  Grey,  January  20,  $300.  Received  from  customers, 
prior  to  January  17,  $35,000.  Paid  to  creditors,  prior  to  Jan- 
uary 17,  $20,000. 

Plimpton  died  on  January  17,  leaving  his  estate  to  his  wife. 
The  business  was  continued  by  the  surviving  partners  who  did 
not  settle  with  the  widow  until  April  30,  at  which  time,  however, 
they  paid  her  what  was  due  her  with  interest  at  6%.  Prepare 
an  accounting  such  as  the  partners  might  have  rendered  to  the 
widow. 

Solution  to  Problem  No.  9 


Copartnership  settlements  are  among  the  most  difficult  ac- 
countings to  prepare.  The  agreements  rarely  stipulate  clearly 
what  shall  be  done  in  case  of  death. 

It  is  a  well-known  fact,  of  course,  that  death  terminates  a 
contract.  Copartnership  agreements  are  no  exception  to  this 
general  rule.  Death,  however,  does  not  by  any  means  terminate 
the  business.  The  business  may  continue  if  the  surviving  part- 
ner or  partners  so  elect.  In  such  cases,  the  continuing  partners 
become  trustees  in  the  business  for  the  estate  of  the  deceased 
partner. 

The  point  at  issue  is  the  determination  of  the  extent  of  the 
interest  of  the  deceased  at  the  time  of  his  death.  Unfortunately 
for  the  accountant,  death  pays  no  respect  to  the  periods  which 
govern  the  stating  of  accounts.  Rarely  does  a  death  occur  at 
the  end  of  the  month  or  year  at  which  times  inventories  are 
taken  and  other  measures  incident  to  the  closing  of  the  books 
effected.  On  this  account  it  becomes  necessary  to  draw  a  sharp 
line  of  demarcation  in  the  financial  transactions  at  the  date  of 
death  unless  the  copartnership  agreement  provides  that  the  in- 
terest of  the  deceased  shall  be  determined  as  at  the  end  of  the 
month  or  year  in  which  the  death  occurs. 


3j^  weeks. 


77 


Elementary  Accounting  Problems 

Such  was  not  the  case,  apparently,  judging  from  the  text  of 
the  problem,  in  the  copartnership  of  which  Plimpton,  Gordon  and 
Grey  were  members.  Plimpton  died  on  January  17,  and  we  are 
charged  by  the  problem  with  the  preparation  of  an  accounting 
such  as  the  surviving  partners  would  probably  have  rendered  to 
the  widow. 

The  question  before  us  is  to  determine  the  extent  of  Plimp- 
ton's share,  or  equity,  in  the  business  at  the  close  of  business  on 
January  17.  It  is  presumed  to  be  the  desire  of  the  surviving 
partners  to  render  to  the  widow  such  an  accounting  as  will  be 
complete  and  satisfactory.  To  do  this  it  would  seem  necessary 
to  prepare  not  only  a  statement  which  would  show  financial  con- 
dition at  January  17,  but  an  additional  statement  which  would 
establish  the  connection  between  such  statement  of  financial  con- 
dition and  the  last  preceding  similar  statement  which  Plimpton 
is  presumed  to  have  received.  It  is  therefore  suggested  that  the 
problem  will  be  properly  solved  and  the  most  exacting  demands 
of  the  widow  satisfied  if  there  is  prepared  a  general  balance 
sheet  at  the  close  of  business  January  17,  1912,  and  a  statement 
of  income  and  profit  and  loss  for  the  seventeen  days  from  De- 
cember 31,  191 1,  to  said  date,  supplemented  by  an  interest  calcu- 
lation which  will  show  how  much  the  widow  was  to  have  re- 
ceived on  April  30,  1912. 

The  first  step  in  the  solution  consists  in  setting  up  a  working 
sheet  which  will  have  as  its  basis  the  items  comprising  the  trial 
balance  of  the  general  ledger  at  December  31,  191 1.  Subse- 
quently, journal  entries,  setting  forth  the  transactions  for  the 
portion  of  the  month,"prior  to  and  including  January  17,  together 
with  accruals  at  said  date,  may  be  framed.  If  these  then  be 
posted  in  the  adjustment  columns  and  the  accounts  adjusted  and 
classified,  there  can  be  found  with  very  little  difficulty  the  items 
from  which  the  balance  sheet  and  income  statements  may  be 
prepared.  Assuming  that  the  working  sheet  has  been  raised  with 
the  items  of  December  31,  191 1,  therein,  the  journal  entries  are 
now  given : 

Purchases   $12,000.00 

To  accounts  payable  $12,000.00 

***** 

Accounts  receivable    13,500.00 

To  sales   13,500.0a 

***** 

78 


Problem  Number  Nine 

Salaries  of  salesmen 630.53 

To  salaries  accrued 

17/31  of  $1,150.00 

***** 

Traveling  expense  funds  1,500.00 

To  cash  

***** 

Traveling   expenses — salesmen    510.00 

To  traveling  expense  funds 

***** 

Advertising 50.00 

Advertising — unused   40.00 

To  accounts  payable 

***** 

Office  salaries 4350o 

To  cash 

Salaries  accrued 

***** 

General    expense 125.00 

To  accounts  payable  

***** 

Plimpton — drawing    account 200.00 

Gordon — drawing  account 500.00 

To  cash 

***** 

Cash 35,000.00 

To  accounts  receivable 

***** 

Accounts   payable    20,000.00 

To  cash  

***** 

Salaries  of  partners 325-00 

To  cash  

Plimpton — drawing  account  

Gordon  to  Jan.  17—2^  weeks  at  $40 $100 

Grey  to  Jan.  17 — 2^4  weeks  at  $40 100 

Plimpton  to  Jan.  13 — 2  weeks  at  $50 100 

$300 
Plimpton  accrued  to  Jan.  17 — ^  week  at  $50. .     25 

$325 
***** 

Accrued  interest  on  notes  receivable  .- 13-32 

To  interest  on  notes  receivable  

I  month,  2  days  (legal  method). 

*  *  *  *  ♦ 

79 


630.53 


1,500.00 


510.00 


90.00 


348.00 
87.00 


125.00 


700.00 


35,000.00 


20,000.00 


300.00 
25.00 


13.32 


Elementary  Accounting  Problems 

Interest  on  bond  and  mortgage  payable 51I4.21 

To   interest   accrued  on   bond   and   mortgage 

payable    51421 

3  months,  16  days  (legal  method). 

***** 

Interest  on  notes  payable 63.58 

To  interest  accrued  on  notes  payable 63.58 

1  month,  16  days  (legal  method). 

***** 

Interest  on  investment 263.01 

To  Plimpton,  drawing  account 13151 

Gordon,  drawing  account 78.90 

Grey,  drawing  account 52.60 

16  days  (legal  method)    (original  investment). 

***** 

Plimpton,  drawing  account .06 

To  interest  on  drawings .06 

2  days  (legal  method). 

***** 

Provision  for  depreciation  of  buildings 121.79 

To  reserve  for  depreciation  of  buildings 121.79 

17/365  of  $2,615. 

***** 

Goodwill    20.ooaoo 

To  Plimpton,  capital  account 10,000.00 

Gordon,  capital  account 6,000,00 

Grey,  capital  account 4,000.00 

***** 

Inventory  (new)  t 47,000.00 

To  inventory  (old) 47,000.00 

***** 

Profit  and  loss 475.26 

To  Plimpton,  drawing  account 158.42 

Gordon,  drawing  account 158.42 

Grey,  drawing  account 158.42 

t  Sales  ($13.500) -^  135%  =  cost  of  sales  ($10,000).  Purchases  ($12,000)  less  cost 
($10,000)  =  increase  in  inventory  ($2,000).  Inventory  121/3/11  ($45,000)  plus  increase 
($2,000)  =  inventory  1/17/12  ($47,000). 


80 


Problem  Number  Nine 


WORKING  SHEET— JANUARY  17,   1912 


Trial 

Balance 

Dec.  31.  1911 

Land  and  buildings   $  72,300.00 

Furniture  and  fixtures   3,000.00 

Securities  owned    10,000.00 

Merchandise — inventory    45,000.00 

Cash    12,000.00 

Accounts  receivable    37,000.00 

Notes   receivable    3,000.00 

Purchases    

Salaries  of  salesmen   

Traveling  expense  funds   

Traveling    expense — salesmen    

Advertising    

Advertising — unused 

Office   salaries    

General  expense   

Salaries  of  partners   

Accrued  interest  on  notes  receivable.. 
Interest  on  bond  and  mortgage  payable 

Interest  on  notes  payable   

Interest  on  capital    

Provision  for  depreciation  of  buildings. 

Goodwill    

Inventory    (new)    

Profit  and  loss    


Adjustments 
Dr.  Cr. 


$35,000.00 


13,500.00 

12,000.00 

630.53 

1,500.00 

510.00 

50.00 

40.00 

435.00 

125.00 

325.00 

13.32 

514.21 

53.58 

263.01 

121.79 

20,000.00 

47,000.00 


$47,000.00 
(  300.00) 
(  20,000.00) 
(  1,500.00) 
(  348.00) 
(  700.00) 
35,000.00 


510.00 


Balance 

Sheet 
$  72,300.00 
3,000.00 

10,000.00 


Statement 
of  Income 
and  Profit 
and  Loss 


24,152.00 


15,500.00 
3,000.00 


.00 


40.00 


13.32 


20,000.00 
47,000.00 


*$  2,000.00 


12,000.00 
630.53 

510.00 
50.00 

435.00 
125.00 
325.00 

514.21 

63.58 

263.01 

121.79 


475.26 


$182,300.00 


$195,995.32      $13,513.38 


Mortgage  payable    $  35,000.00 

Accounts   payable    21,070.00      20,000.00 

Notes  payable   10,000.00 

Reserve  for  depreciation  of  buildings..  7,230.00 
Proprietorship: 

Plimpton     50,000.00 

Gordon     32,527.00 

Grey   21,473.00 

Drawing  accounts: 

Plimpton 200.06 

Gordon    500 

Grey   

Sales    

Salaries    accrued    

Interest  on  notes  receivable 

Interest   accrued    on   bond   and   mort- 
gage payable    

Interest  accrued  on  notes  payable.... 
Interest  on  drawings  


(  12,000.00) 
(  90.00) 

(        125.00) 

121.79 

10,000.00 
6,000.00 
4,000.00 


158.42) 
25.00) 

131.51) 

158.42) 
78.90) 

158.42) 
52.60) 

13,500.00 

717.53 

13.32 

514.21 
63.58 

.06 


$  35,000.00 

13,285.00 

10,000.00 
7,351.79 

65,000.00 
38,527.00 
25,473.00 


114.87 

t  262.68 
211.02 

717.53 


13,500.00 
13.32 


514.21 
63.58 


.06 


$182,300.00 


$195,995.32      $13,513. 


•  Credit  item, 
t  Debit  item. 


8i 


Elementary  Accounting  Problems 

PLIMPTON,    GORDON    &    GREY 

General  Balance  Sheet — January  17,  1912 

Liabilities  and  Capital 
^^^^i^  Bond  and  mortgages  payable   ..$  35,000.00 


Land  and-  buildings  $  72,300.00 


Current  liabilities 


Furniture  and  fixtures   $     3,000.00  Salaries  accrued   $  717.53 

Accounts  payable  13,285.00 

Securities   owned    $  10,000.00  Notes  payable    10,000.00 

Interest  accrued  on  bond  and 

Goodwill    $  20,000.00               mortgage   payable    514.21 

Interest      accrued      on      notes 

Merchandise — inventory    $  47,000.00               payable    63.58 


Current  assets:  Total   current   liabilities.  .$  24,580.32 

Cash    $  25,142.00  

Accounts   receivable    15,500.00  Proprietorship: 

Notes  receivable   3,000.00  Restricted: 

Accrued  interest  on  notes  re-  Reserve     for    depreciation 

ceivable   13.32  of   buildings    $     7,351.79 

Unrestricted: 

Total  current  assets.. $  43,655.32  Plimpton   $65,114.87 

Gordon     38,264.32 

Advertising— unused    $  40.00  Grey    25.684.02       129,063.21 

Total   proprietorship $136,415.00 

Total  assets   $195,995.32  Total   liabilities  and  capital.  .$195,995.32 

PLIMPTON,    GORDON    &    GREY 

Statement  of  Income  and  Profit  and  Loss  for  the  Seventeen 
Days  Ended  January  17,  1912 

Sales  $13,500.00 

Cost  of  sales  : 

Purchases  $12,000.00 

Less — increase  in  inventory 2,000.00      10,000.00 

Gross  profit  on  sales $  3,500.00 

Selling  expense: 

Salaries  of  salesmen $     630.53 

Traveling   expenses — salesmen 5 10.00 

Advertising    50.00 


Total 


1,190.53 


Selling  profit $  2,309.47 

Administrative  expense 

Office  salaries $     435.00 

Salaries  of  partners 325.00 

General  expenses 125.00 

Total    885.00 

Net  profit  on  sales — income  from  operation $  1,424.47 

Other  income    interest  on  notes  receivable 13.32 

Total    income $  1,437.79 

Deductions  from  income: 
Interest  on  bond  and  mortgage  payable $     514.21 

82 


Problem  Number  Nine 

Interest  on  notes  payable 63.58 

Interest  on  investment  (net) 262.95 


Total   840.74 


Net  income — profit  and  loss $597.05 

Profit  and  loss  charge — provision  for  depreciation 
of  buildings 121.79 


Profit  and  loss  surplus  for  the  period $475.26 

Plimpton     Gordon         Grey 
Proprietorship— Dec.  31,  191 1.. $55,000.00  $32,527.00  $21,473.00 
Add: 

Goodwill    10,000.00      6,000.00      4,000.00 

Interest  on  investment i3i-45  78.90  52.60 

Salary  accrued 25.00 


Total    $65,156.45  $38,605.09  $25,525.60 

Deduct — drawings  200.00         500.00 


Proprietorship,  as  adjusted $64,956.45  $38,105.90  $25,525.60    128,587.95 

Add — PROFITS  158.42         158.42         158.42 


Proprietorship— Jan.  17,  1912.  .$65,114.87  $38,264.32  $25,684.02  $129,063.21 


ACCOUNT    OF    DECEASED    PARTNER— FINAL    SETTLEMENT 

Capital — January  17,  1912 $65,114.87 

Interest— January  17  to  April  30,  1912 — 3  months  and  13  days 

(legal  method) 1,115.87 


Amount  paid  to  widow , $66,230.74 


Problem  No- A  (Practice) 

The  balance  sheet  of  Redmond,  Short  &  Collins,  March  31, 
19 1 2,  contained  the  following  items : 

Land  and  buildings,  *$8o,ooo ;  furniture  and  fixtures,  $3,000 ; 
$10,000  St.  Louis  &  Southern  Mountain  4's,  carried  at  par,  inter- 
est payable  May  i  and  November  i,  last  collected  November  i, 
191 1,  merchandise  inventory,  $50,000;  cash,  $15,0000;  accounts 
receivable,  $32,000;  note  receivable,  dated  March  12,  1912,  in- 
terest 6%,  $4,000;  bond  and  mortgage  payable,  $50,000,  interest 
6%  payable  January  i  and  July  i,  last  paid  January  i,  1912;  ac- 
counts payable,  $24,725 ;  notes  payable,  $12,000,  dated  March 
I,  1912,  interest  5%  ;  reserve  for  depreciation  of  buildings  (ij4 
years).    $5,000;    capital — A.      Redmand,    $54,327    (investment 


Land  $25,000. 

83 


Elementary  Accounting  Problems 

$40,0<X),  drawing  account  $14,327)  ;  capital — B.  Short,  $23,484 
(investment,  $20,CX)0,  drawing  account,  $3,484)  ;  capital — C.  Col- 
lins, $24,464  (investment  $20,000,  drawing  account,  $4,464). 

The  transactions  during  April  were  as  follows:  Purchases, 
$40,000;  sales,  $35,000;  advertising  expense  (for  April  magazine 
insertions,  invoices  received  but  unpaid  at  April  30)  ;  salaries 
of  salesmen,  $900  (paid  April  30)  ;  traveling  expenses,  salesmen, 
$675  (expense  reports  received  but  not  vouchered  at  April  30)  ; 
salaries  of  clerks,  $150  a  week  (paid  to  include  April  27)  ; 
salaries  of  partners,  paid  by  the  week,  Redmond,  $40;  Short, 
$30 ;  Collins,  $25  ;  general  expense,  $240 ;  drawings — Redmond, 
$200,  April  2;  Short,  $300,  April  15;  Collins,  $250,  April  20; 
receipts  from  customers,  $17,500;  payments  to  creditors,  $20,000. 

Interest  was  according  to  the  copartnership  agreement  al- 
lowed on  investments  and  charged  on  drawings  at  the  rate  of  6% 
per  annum. 

Short  died  on  April  15. 

The  goodwill  was  for  the  purpose  of  settlement  valued  at 
$15,000.  Analyses  showed  purchases  prior  to  April  15  to  be 
$22,786;  sales,  $19,427;  collections  on  accounts  receivable,  $9,- 
827;  payments  to  creditors,  $7,500.  The  inventory  ascertained  by 
working  back  the  sales  at  cost  was  estimated  at  $57,957. 

Prepare  an  accounting  to  be  rendered  to  the  heirs  of  the 
deceased  partner,  assuming  that  settlement  was  had  with  them 
on  May  5,  19 12,  and  that  interest  was  allowed  on  Short's  capital 
from  the  date  of  his  death  to  the  date  of  settlement. 


84 


Problem  Number  Ten 

PROBLEM  No.  lo 
Demonstration 

The  following  is  a  trial  balance  taken  from  the  general  ledger 
of  Johnson,  Morton  &  Swift,  a  copartnership,  after  closing 
August  31,  1912: 

Debits:  Land  and  buildings,  $200,000;  equipment,  $40,000; 
furniture  and  fixtures,  $8,000;  motor  trucks,  $9,000;  goodwill, 
$50,000;  materials  and  supplies,  $43,297.52;  goods  in  process, 
$14,782.47;  finished  goods,  $18,325.75;  cash,  $12,947.82;  ac-- 
counts  receivable,  $23,478.31 ;  notes  receivable  and  interest, 
$8,098.47;  advertising  paid  in  advance,  $800;  insurance  unex- 
pired, $360;  consignees,  $3,827.95. 

Credits:  Bond  and  mortgage  payable  and  interest,  $50,500 
(interest  6%,  payable  July  i  and  January  i,  last  paid  July  i, 
1912) ;  taxes  accrued,  $1,752;  salaries  and  wages  accrued, 
$257.32;  accounts  payable,  $65,843.17;  notes  payable  and  inter- 
est, $25,135.20;  M.  T.  Johnson,  proprietorship,  $100,425.68;  B. 
L.  Morton,  proprietorship,  $86,318.47;  E.  W.  Swift,  proprietor- 
ship, $98,858.50 ;  consigned  sales,  $3,827.95. 

According  to  the  terms  of  the  articles  of  copartnership,  in 
the  event  of  the  death  of  a  partner,  the  accounts  were  to  be 
stated  at  the  end  of  the  month  in  which  the  death  occurred  and 
the  business  was  to  be  liquidated  forthwith.  The  surviving 
partners  were  to  receive  as  compensation  for  such  services, 
10%  of  all  cash  collected. 

Morton  died  on  August  20.  The  surviving  partners  pro- 
ceeded in  accordance  with  the  agreement  and  effected  the  fol- 
lowing transactions:  Motor  trucks  were  sold  for  $5,275;  the 
land,  buildings,  equipment,  furniture  and  fixtures  were  sold  to 
a  concern  which  took  over  the  mortgage,  agreed  to  pay  the  taxes 
and  paid  Johnson,  Morton  &  Swift,  $175,000;  the  salaries  and 
wages  accrued  were  paid;  the  surviving  partners  took  over  the 
material  and  supplies,  goods  in  process  and  finished  goods  at  the 
book  values;  the  notes  payable  of  $25,000  were  paid  with 
interest   amounting  to  $197.70;   accounts   receivable   were   col- 

85 


Elementary  Accounting  Problems 

lected  except  $782.54  and  $324.57  which  represented  the  balance 
due  from  a  concern  in  bankruptcy  which  had  paid  its  final  liqui- 
dation dividend;  the  creditors  were  paid  in  full;  the  notes 
receivable  were  discounted,  realizing,  $8,043.86;  the  insurance 
poHcies  were  transferred  to  the  concern  which  purchased  the 
building  in  consideration  of  $360,  the  amount  of  the  unexpired 
insurance  which  was  received;  no  arrangements  could  be  made 
with  the  advertising  agents  to  transfer  the  account  for  advertis- 
ing; the  balance  of  cash  was  distributed  among  the  estate  of  the 
deceased  and  the  surviving  partners. 
From  the  foregoing  set  up: 

(a)  Cash  account. 

(&)  Profit  and  loss  account. 

(c)  Proprietorship  accounts  of  partners. 


Solution  to  Problkm  No.  10 

The  first  step  in  the  solution  consists  in  raising  the  trial  bal- 
ance from  the  accounts  given  in  the  text.  Careful  scrutiny  of 
the  accounts  reveals  the  fact  that  the  trial  balance  has  all  the 
essentials  of  a  balance  sheet.  The  notes  receivable  are  seen  to 
include  the  accrued  interest.  The  same  is  true  of  the  bond  and 
mortgage  payable  and  the  notes  payable.  Accruals  are  im- 
portant items  in  stating  the  accounts  for  the  purpose  of  settle- 
ment. In  this  case  all  accruals  appear  to  have  been  spread  on 
the  books.  There  is  no  reserve  for  depreciation.  This,  how- 
ever, in  a  situation  of  this  kind  is  not  essential,  since  the  property 
is  subsequently  sold.  If  such  reserve  had  existed,  while  it  would 
have  decreased  the  proprietorship  in  this  or  prior  periods,  it 
would  also  have  decreased  the  loss  on  the  property  at  the  time 
of  sale. 

The  stipulations  in  the  contract  of  copartnership  relative  to 
the  stating  of  the  accounts  are  perhaps  unusual  but  decidedly 
practical.  Many  hours  of  labor  and  annoyance  would  be  saved 
if  all  copartnership  agreements  were  to  provide  for  the  stating 
of  the  accounts  in  such  manner  in  the  case  of  death.  To  liqui- 
date a  business  upon  the  death  of  a  partner  and  pay  the  surviv- 
ing partners  a  commission  for  liquidating  is  also  the  exception 

86 


Problem  Number  Ten 

rather  than  the  rule ;  but  it  must  be  remembered  that  the  partners 
may  contract  to  do  anything  not  illegal  and  the  contract  must 
govern. 

Obviously  the  solution  to  the  problem  is  decidedly  easy  in  so 
far  as  what  is  to  be  done  is  concerned.  The  assets  must  be  con- 
verted into  cash;  the  Habilities  liquidated;  the  losses  accounted 
for;  the  surviving  partners  compensated  for  their  services  as 
liquidators  and  the  remaming  cash  distributed  among  all  the 
parties  interested.  The  question  arising  then  becomes  one  of 
method. 

The  standard  working  sheet  is  always  available.  To  use  it 
in  this  case  would  be  set  up  the  trial  balance;  frame  and  post 
the  journal  entries  incident  to  realization  and  liquidation  and 
apply  the  items  appearing  in  the  adjustment  column  to  the  re- 
spective figures  in  the  trial  balance.  Anticipating  the  result  it 
will  be  seen  that  there  would  be  no  necessity  for  a  fourth  column 
since  the  accounts  would  be  closed  out  automatically  by  the 
posting  of  the  journal  entries,  if  the  figures  were  correct. 

A  briefer  method  would  consist  in  the  use  of  a  modified 
working  sheet  such  as  that  shown  below.  With  this  working 
sheet  the  journal  entries  are  eliminated  and  altogether  the 
process  is  not  as  clean  cut  as  in  the  first  case.  Brevity  is  its 
recommendation  but  its  use  is  attended  with  some  confusion 
and  danger  of  inaccuracy  in  the  result. 

Trial 

balance 

August 

31,1912 

Land  and  buildings    $200,000.00 

Equipment    40,000.00 

Furniture  and  fixtures  8,000.00 

Motor  trucks    9,000.00 

Goodwill     50,000.00 

Materials  and  supplies    ....     43,297.52 

Goods  in  process    14,782.47 

Finished   goods    18,325.75 

Cash  12,947.82 

Accounts  receivable   23,478.31 

Notes  receivable  and  interest      8,098.47 
Advertising  pd.  in  advance.         800.00 

Insurance   unexpired    360.00  360,00 

Consignees    3.827.95         3,827.95 


Cash 

Profit  and 

receipts 

loss  items 

and  dis- 

and  pro- 

Offsets 

Dursements  prietorship 

$  52,252.00 

$175,000.00 

$  20,748.00 

5,275.00 

3.725.00 
50,000.00 

43,297.52 

14,782.47 

18,325.75 

12,947.82 

22,371.20 

1,107.11 

8,043.86 

54.61 
800.00 

$432,918.29    $i32.485-69  $223,997-88  $  76,434-72 
87 


Elementary  Accounting  Problems 

Bond  and   mortgage  payable 

and  interest $  50,500.00  $  50,500.00 

Taxes  accrued i,752.oo        1,752.00 

Salaries  and  wages  accrued. .  257.32                      $       257.32 

Accounts  payable 65,84'3-i7                          65,843.17 

Notes  payable  and  interest...  25.135.20                           25,197.70*$       62.50 

M.  F.  Johnson,  proprietorship  100,425.68      38,202.87       10,552.50      51,670.31 

B.  L.   Morton,  proprietorship  86,318.47                                                86,318.47 

E.   W.    Swift,   proprietorship  98,858.50      38,202.87      10,552.50 .     50,1031.13 

Consigned  sales 3>827.9S        3,827.95 

$432,918.29  $1132,485.69  $112,403,19  $188,029.41 
♦Debit  among  credits. 

This  working  sheet  leaves  something  to  be  desired  in  the 
way  of  explanation.  Each  section  proves  separately  by  cross- 
footing  the  last  three  columns,  thus  establishing  the  mathematical 
accuracy  of  the  work;  assets  and  liabilities  are  all  accounted 
for;  the  cash  receipts  and  disbursements  articulate  with  the  re- 
spective complementary  accounts  but  the  balance  of  cash  ($iii,- 
594.69)  does  not  agree  with  combined  proprietorship  accounts 
($188,091.91).  The  difference  is  $76,497.22.  Careful  inspection 
will  discover  that  the  losses  have  not  been  distributed  on  the 
working  sheet.  If  to  the  total  of  $76,434.72,  as  shown  in  the 
profit  and  loss  column  in  the  upper  section,  tliere  is  added  $62.50 
representing  additional  interest  paid  on  notes  payable,  it  will  be 
seen  that  the  amount  is  $76,497.22.  If  this  amount  then  were 
to  be  divided  equally  among  the  partners'  accounts  the  balances 
would  show  the  respective  portions  of  $111,594.69  in  cash  which 
each  would  receive. 

The  items  of  $10,552.50  appearing  opposite  the  capital  ac- 
counts of  Johnson  and  Swift  represent  the  commission  (10% 
of  $211,050.06)  which  they  received  for  their  services  in  settling 
up  the  affairs  of  the  copartnership.  The  question  may  be  raised 
as  to  the  prevalence  of  such  practice.  It  is  sufficient  to  say  that 
it  has  been  known  to  occur  and  upon  investigation  the  justice  of 
it  will  be  apparent.  At  the  close  of  business  on  August  31, 
1912,  the  business  stopped  automatically.  The  surviving  part- 
ners were  obliged  to  devote  their  attention  to  liquidating  it.  They 
were  not  free  to  offer  their  services  elsewhere  or  engage  in 
other  business  and  they  were  paid  for  their  services  in  winding 
up  the  affairs  of  the  firm.    The  charge  for  their  compensation  is 

88 


Problem  Number  Ten 

made  to  profit  and  loss  and  credited  to  their  capital  accounts  in 
equal  parts.  If  the  propriety  of  making  the  charge  to  profit  and 
loss  is  questioned,  a  moment's  thought  will  reveal  the  fact  that 
the  only  other  place  where  it  might  be  charged,  namely,  Mor- 
ton's account,  would  be  a  highly  improper  place  since  it  would 
have  the  eflfect  of  making  Morton's  estate  stand  the  entire  ex- 
pense of  liquidation. 

The  accounts  required  by  the  problem  follow : 

CASH 

1912  1912    ^  ,    .     „ 

Aug.  31  Balance $  12,947.82      Salaries  &  wages  $      257.32 

Motor  trucks  . . .       5-275  00                     Accounts  payable  65,843.17 

Land,  etc 175,000.00                     Notes  payable  . .  25,197,70 

Accounts  rec.   ..     22,371.20                     Commission 21,105.00 

Notes  rec 8,043.86                     M.T.Johnson..  29,688.74 

Insurance 360.00                     Est.  B.  L.  Mor- 
ton     53,784.39 

E.W.Swift....  28,121.56 


$223,997.88  $223,997.88 

PROFIT  AND  LOSS  ACCOUNT 


1912  1912 

Land,    buildings,  M.  T.  Johnson.. $  32,534.07 

etc $20,748.00  Est.  B.  L.   Mor- 

Motor  trucks    . .       3,725.00  ton    32,534,08 

Goodwill  50,000.00  E.  W.  Swift 32,534.07 

Accounts  rec.    ..  1,107.11 

Int.  on  notes  rec.  54.61 

Advertising    ....  800.00 
Interest  on  notes 

payable    62.50 


Commission  ....     21,105.00 


$97,602.22  $97,602.22 

M.  T.  JOHNSON 

1912  1912 

-^—    Mdse.,  etc $  38,202.87      Aug.  31  Balance  $100,425.68 

Cash     10,552.50  Commission  ....     10,552.50 

P-  &  I^ 32,53407 

Cash    29,688.74 


$110,978.18  $110,978.18 

89 


Elementary  Accounting  Problems 

1912  1912 

P.  &  L $  32,534.08     Aug.  31  Balance     $  86,318.47 

Cash    53,784-39 


$  86,318.47  $  86,318.47 

E.  W.  SWIFT 

1912  1912 

Mdse.,  etc $38,202.87     Aug.  31  Balance     $98,858.50 

Cash     10,552.50  Commission 10,552.50 

P.  &  L 32,53407 

Cash    28,121.56 

$109,411.00  $109,411.00 


Probi,i:m  No.  io-a  (Practice) 

The  following  is  a  trial  balance  taken  from  the  general  ledger 
of  Barnum,  King  &  Wheeler,  a  copartnership,  after  closing 
August  31,  1912: 

Debits:  Land  and  buildings,  $250,000;  equipment,  $50,000; 
furniture  and  fixtures,  $10,000;  motor  trucks,  $10,000;  goodwill, 
$60,000;  materials  and  supplies,  $34,257.92;  goods  in  process, 
$15,872.74;  finished  goods,  $20,523.57;  cash,  $14,147.28;  ac- 
counts receivable,  $25,874.13;  notes  receivable  and  interest, 
$10,125.32;  advertising  paid  in  advance,  $1,000;  insurance  un- 
expired, $540;  consignees,  $2,421.18. 

Credits:  Bond  and  mortgage  payable,  and  interest,  $50,500 
(interest  6%,  payable  July  i  and  January  i,  last  paid  July  i, 
1912)  ;  taxes  accrued  $1,940;  salaries  and  wages  accrued,  $325; 
accounts  payable,  $75,348.77;  notes  payable  and  interest,  $35,- 
148.37;  A.  Barnum,  proprietor,  $113,500;  B.  King,  proprietor- 
ship, $125,000;  C.  Wheeler,  proprietorship,  $103,000;  consigned 
sales,  $2,421.18. 

The  articles  of  copartnership  specified  that,  in  the  event 
of  the  death  of  a  partner  or  partners,  the  accounts  were  to  be 
stated  at  the  end  of  the  month  in  which  the  death  or  deaths 
occurred  and  the  business  was  to  be  discontinued  and  liquidated. 
The  surviving  partners  were  to  receive  as  compensation  for  such 
services  10%  on  all  cash  disbursed  to  outsiders. 

90 


Problem  Number  Ten 

Barnum  and  King  were  killed  on  August  23  and  Wheeler 
proceeded  to  realize  and  liquidate.  The  transactions  were  as 
follows :  Motor  trucks  sold  for  $6,000 ;  land,  buildings,  equipment 
and  furniture  were  sold  to  Benton  &  Hughes  who  took  the 
property  subject  to  the  mortgage  and  taxes  and  paid  $180,000 
in  cash;  the  salaries  and  wages  were  paid;  Wheeler  took  over 
the  working  and  trading  assets  at  their  book  value;  the  notes 
payable  and  interest  were  paid;  accounts  receivable  were  col- 
lected except  $875.13  which  was  written  off;  the  creditors  were 
paid  in  full;  the  notes  receivable  were  discounted  realizing 
$10,087.25;  insurance  policies  realized  $500;  advertising  con- 
tracts realized  $800;  the  balance  of  cash  was  distributed  among 
the  estates  of  the  deceased  and  the  surviving  partner  Wheeler 
paid  his  indebtedness. 

From  the  foregoing  prepare: 

(a)  Cash  account. 

(b)  Profit  and  loss  account. 

(c)  Proprietorship  accounts  of  the  partners. 


91 


Elementary  Accounting  Problems 


PROBLEM  No.  ii 

The  American  Chocolate  Company  was  organized  by  James 
Phipps,  Henry  Borman,  and  WiUiam  Jennings,  who  signed  the 
certificate  of  incorporation  and  subscribed  for  ten  shares  each. 
The  certificate  of  incorporation  was  filed  by  the  secretary  of  the 
state  of  New  York  on  July  i,  1912.  The  authorized  capital  stock 
was  $100,000  divided  into  one  thousand  (1,000)  shares  of  the 
par  value  of  $100  each.  The  subscribers  paid  for  their  stock 
on  July  I  St.  The  organization  tax  and  filing  fees  amounted  to 
$54.20. 

The  certificates  issued  to  the  incorporators  were  numbered 
I,  2  and  3,  in  the  order  in  which  the  names  appear  above.  Dur- 
ing the  six  months  subsequent  to  July  ist  the  following  trans- 
actions took  place. 

July  23d,  J.  F.  Dominick  bought  100  shares  and  received  cer- 
tificate No.  4 ;  August  loth,  A.  J.  Hudson  subscribed  for  5  shares 
and  paid  25%  on  account;  August  20th,  the  incorporators  sub- 
scribed for  500  shares  and  paid  25%  on  account;  August  28th, 
certificate  No.  5  for  100  shares  was  issued  to  A.  E.  Pratt  for 
land ;  September  4th,  paid  contractor  $5,000  on  account  of  build- 
ing contract  of  $40,000;  September  loth,  incorporators  paid  25% 
on  account  of  stock;  September  12th,  paid  contractor  $15,000; 
September  14th,  issued  certificate  No.  6  for  50  shares  to  R.  E. 
Holmes  for  patents  on  machinery;  September  17th,  bought  ma- 
chinery for  $10,000,  paying  $5,000  on  account  and  giving  notes 
for  the  balance;  September  20th,  Dominick  sold  25  shares  to 
James  Powers  (new  certificates  No.  7  and  No.  8)  ;  September 
24th,  incorporators  paid  balance  due  on  stock,  except  Jennings, 
who  gave  a  note  for  $5,000  for  part  of  the  amount  due  from  him; 
certificates  were  issued — No.  9  to  Phipps  for  200  shares.  No.  10 
to  Borman  for  200  shares,  and  No.  11  to  Jennings  for  100 
shares;  October  loth,  paid  balance  on  building  contract;  October 
1 2th,  William  Mortimer,  attorney,  rendered  a  bill  of  $500  for 
services  in  connection  with  the  organization  of  the  company; 

92 


Problem  Number  Eleven 

October  14th,  H.  Britton  subscribed  for  15  shares  of  stock  and 
paid  50%  on  account;  October  i8th,  Dominick  sold  5  shares  each 
to  D.  Reed,  H.  Robinson,  and  F.  Stone  (new  certificates  No.  12, 
No.  13,  No.  14,  No.  15)  ;  October  30th,  Hudson  refused  to  make 
further  payments  on  his  subscription  and  it  was  cancelled ;  Octo- 
ber 31st,  Borman  pledged  100  shares  of  his  stock  as  collateral  for 
a  personal  loan  of  $5,000  from  the  Park  National  Bank. 
From  the  foregoing  prepare : 

(a)   Formal  journal  entry  opening  the  general  books  (debit- 
ing  capital   stock  unissued   and   crediting   capital   stock 
authorized). 
{b)   Skeleton  ledger  accounts  showing  the  transactions  on  the 

general  books. 
{c)  General  balance  sheet,  October  31,  1912. 
{d)   Stock  book  as  required  by  law. 
(^)   List  of  stockholders,  showing  number  of  shares  held  by 

each,  October  31,  1912. 
Memo :  acceptance  of  Jenning's  note  found  not  to  be  legal. 
(Penal  law-section  644;  sub-section  3).     Note  replaced  by  cash 

Sept.  27.  

Solution  to  Probi^em  No.  11 

A  careful  persual  of  the  problem  together  with  the  require- 
ments shows  that  the  stock  records  as  well  as  the  financial  records 
are  involved.  For  the  purpose  of  demonstration  the  problem  will 
therefore  be  divided  into  two  parts,  namely,  that  dealing  with  the 
entries  affecting  the  financial  transactions  and  that  dealing  with 
the  stock  record  and  entries. 

The  authority  for  corporate  existence  is  the  charter.     The  ^ 

charter  sets  forth  the  amount  of  the  authorized  capital  stock  f* 

The  corporate  existence  begins  with  the  official  act  of  filing  the 
certificate  of  incorporation  which  is  the  function  of  the  secretary 
of  state.  For  example,  although  a  given  certificate  of  incorpora- 
tion might  be  signed  and  executed  by  the  incorporators  on  July 
I,  if  the  certificate  were  not  officially  filed  by  the  secretary  of 
state  until  July  5,  the  life  or  legal  existence  of  such  corporation 
would  not  begin  until  the  latter  date.  The  law  in  New  York 
prescribes  that  the  filing  and  recording  fees  (filing  $10,  record- 
ing 15c  per  100  words)  shall  be  sent  to  the  secretary  of  state  while 
the  organization  tax  (50c  per  $1,000  of  the  authorized  capital 
stock)  shall  be  paid  to  the  state  treasurer. 

93 


Elementary  Accounting  Problems 

There  may  be  raised  at  this  point  the  very  interesting  question ; 
"How  can  a  corporation  have  funds  and  make  payments  before 
its  legal  existence  begins?"  The  question  may  be  answered  by 
stating  that  the  difficulty  is  overcome  in  at  least  three  different 
ways.  Many  incorporators  deposit  with  their  attorney,  who  pre- 
pares the  papers  and  attends  to  the  incorporating,  a  sum  to  be 
used  for  this  purpose.  It  may  be  remarked  incidentally  that  the 
work  of  preparing  the  papers  belongs  to  the  lawyer  and  is  uni- 
versally conceded  by  the  best  opinions  to  be  without  the  province 
of  the  accountant.  In  other  cases  a  sufficient  sum  is  advanced, 
in  trust  as  it  were,  by  one  or  more  of  the  incorporators,  to  the 
person  charged  with  carrying  out  the  formalities  of  attending  to 
these  payments.  In  still  other  cases,  the  incorporators  pay  for 
all  or  a  part  of  their  stock  subscriptions  in  advance  under  the  con- 
ditions previously  named. 

We  come  now  to  the  method  of  making  the  opening  entries. 
Two  methods  must  be  recognized.  One  consists  in  setting  up  the 
authorized  capital  stock  as  of  the  date  the  corporate  life  begins. 
This  may  be  called  the  formal  method.  The  other  consists  in 
making  a  memorandum  entry  at  such  time,  but  deferring  the 
opening  of  a  capital  stock  account  until  such  time,  and  in  such 
amounts,  as  the  stock  is  issued.  This  is  known  as  the  pro  forma 
method.  Needless  to  say  accountants  differ  in  their  preference. 
The  public  service  commission  of  New  York  and  the  Interstate 
Commerce  Commission  require  the  formal  method.  One  of  the 
leading  members  of  the  accounting  profession  recently  character- 
ized it  as  absurd.  The  author  modestly  recommends  it  since  on 
several  occasions  he  has  spent  hours  and  in  one  case  actually  days 
in  trying  to  ascertain  the  authorized  capital  stock.  In  all  of  these 
cases  the  information  was  essential  to  a  comprehensive  report.  It 
is  proposed  in  these  problems  to  treat  of  both  methods,  since  it  is 
the  desire  to  present  at  all  times  as  many  phases  of  a  situation 
as  possible  rather  than  express  personal  opinions.  In  this  prob- 
lem, however,  the  formal  method  will  be  used  since  it  is  one  of 
the  requirements  of  the  problem.    The  entries  follow: 

1912 

July    I     Capital  stock  unissued  $100,000.00 

To  capital  stock  authorized  $100,000.00 

To  record  the  organization  of  the  Ameri- 
can Chocolate  Company  incorporated  under 
the  laws  of  the  state  of  New  York,  July  i, 

94 


Problem  Number  Eleven 

1912,  with  an  authorized  capital  stock  of 
$100,000  divided  into  1,000  shares  of  the 
par  value  of  $100  each. 

Subscribers  to  capital  stock  $    3,000.00 

To  subscriptions  to  capital  stock $    3,000.00 

For  30  shares  of  stock  subscribed  for  by 
the  incorporators. 

Cash     $    3.000.00 

To  subscribers  to  capital  stock   $    3,000.00 

Stock  paid  for  by  incorporators. 

Subscriptions   to   capital    stock $    3,000.00 

To  capital  stock  unissued  $    3,000.0a 

For  30  shares  of  stock  issued  to  incor- 
porators upon  payment  therefor. 

Organization   expense    $         S4'20 

To   cash    $         54.20 

For  organization  tax  and  filing  fee. 

July  2Z    Cash     $  10,000.00 

To  capital  stock  unissued   $  10,000.00 

For  100  shares  of  stock  issued  for  cash. 

Aug.  10    Subscribers  to  capital  stock  $       500.00 

To  subscriptions  to  capital  stock $       500.00 

For  subscription  to  5  shares  of  stock. 

Aug.  10    Cash     $       125.00 

To  subscribers  to  capital  stock $       125.00 

For  25%  paid  on  account  of  above  stock 
subscription. 

Aug.  20    Subscribers  to  capital  stock   $  50,000.00 

To  subscriptions  to  capital  stock $  50,000.00 

For  subscriptions  to  500  shares  of  stock. 

Cash     $  12,500.00 

To  subscribers  to  capital  stock $  12,500.00 

First  payment  of  25%  on  account. 

Aug.  28    Land    $  10,000.00 

To  capital  stock  unissued   $  10,000.00 

For   100   shares   of    stock   issued   to   A.    E. 
Pratt  for  land. 

Sept.  4    Buildings    $    5,000.00 

To   cash    $    5,000.00 

95 


Elementary  Accounting  Problems 

First  payment  on  account  of  $40,000  build- 
ing contract. 

Sept  10    Cash    $  12,500.00 

To  subscribers  to  capital  stock $  12,500.00 

Second    payment   of    25%    on    account   of 
stock  subscriptions. 

Sept.  12    Buildings    $  15,000.00 

To   cash    $15,000.00 

Second   payment   on   account   of   building 
contract. 

Sept.  14    Patents    $    5,000.00 

To  capital  stock  unissued  $    5,000.00 

For   50  shares   of   stock   issued  to   R.   E. 
Holmes  for  patents  on  machinery. 

Sept.  17     Machinery    $  10,000.00 

To  cash    $    5,000.00 

Notes  payable   5,000.00 

Sept.  24    Cash    $20,000.00 

Notes    receivable    5,000.00 

To  subscribers  to  capital  stock $  25,000.00 

Balance  due  on  account  of  stock  subscrip- 
tions.   Note  received  from  Wm.  Jennings. 

Subscriptions  to  capital  stock $  50,000.00 

To  capital  stock  unissued  $  50,000.00 

Oct.  10    Buildings     $  20,000.00 

To    cash    $  20,000.00 

Final    payment    on    $40,000    building    con- 
tract. 

Oct.  12     Organization  expense   $       500.00 

To  accounts  payable  $       500.00 

Legal   expenses  in  connection  with  incor- 
poration. 

Oct.  14    Subscribers  to  capital  stock  $     1,500.00 

To  subscriptions  to  capital  stock $    1,500.00 

Subscription  to  15  shares  of  capital  stock. 

Cash     $       750.00 

To  subscribers  to  capital  stock $       750.00 

Payment  of  50%  on  account  of  above  sub- 
scription. 

Oct.  30    Subscriptions  to  capital  stock  $       500.00 

To  subscribers  to  capital  stock $       375.00 

Profit  and  loss  125.00 

96 


Problem  Number  Eleven 

For  subscription  of  A.  J.  Hudson  to  5 
shares  of  capital  stock  cancelled  on  account 
of  failure  to  pay  balance  due  on  stock. 

SKELETON  LEDGER  ACCOUNTS 

Capital  Stock  Unissued  Capital  Stock  Authorized 


$100,000.00 


$100,000.00 


Bal.  $  22,000.00 


Bal. 


$  3,000,00 
10,000.00 
10,000.00 
5,000.00 
50,000.00 
22,000.00 

$100,000.00 


$100,000.00 


Subscribers  to  Capital  Stock 


Subscriptions  to  Capital  Stock 


$    3,000.00 

$ 

3,000.00 

500.00 

125.00 

50,000.00 

12,500.00 

1,500.00 

12,500.00 

25,000.00 

750-00 

375-00 

Bal 

750.00 

$  55,000.00 

$ 

55,000.00 

Bal.  $       750.00 

$    3,000.00 

50,000.00 

500.00 

Bal.         1,500.00 

$    3,000.00 

500.00 

50,000.00 

1,500.00 

$  55,000.00 

$  55,000.00 

Bal.  $    1,500.00 

Cash 


$    3,000.00 

$         54.20 

10,000.00 

5,000.00 

125.00 

15,000.00 

12,500.00 

5,000.00 

12,500.00 

20,000.00 

20,000.00 

750.00 

5,000.00 

Bal. 

18,820.80 

$  63,875.00 

$  63,875.00 

Bal.  $  18,820.80 

Land 

$  10,000.00 

97 


Notes  Payable 


$    5,000.00 


Accounts  Payable 


$       500.00 


Elementary  Accounting  Problems 
Buildings  Notes  Receivable 


$    5,000.00 
15,000.00 
20,000.00 

Patents 

$    5,000.00 

Organization  Expense 

%         54.20 
500.00 

$    5,000.00 


$    5,000.00 


Machinery 


$  10,000.001 
Profit  and  Loss 


125.00 


THE  AMERICAN  CHOCOLATE  COMPANY 
Generai,  Bai^ance  Sheet — October  31,  1912 


Assets 


Liabilities  and  Capital 


Land   and   buildings $50,000.00 


Machinery    10,000.00 


Patents     5,000.00 


Current  assets : 

Cash    $  18,820.80 

Subscribers    to   capital 
stock   750.00 

Total  current  assets  $  19,570.80 


Organization   expense    ..  554-20 


Total  assets $  85,125.00 


Capital  Stock : 

Authorized     $100,000.00 

Less — unissued    22,000.00 


Issued  and  outstanding..     78,000.00 


Subscriptions    to    capital 
stock    1 ,500.00 


Current   liabilities : 

Accounts   payable    $       500.00 

Notes   payable    5,000.00 


Total   current  liabilities  $    5,500.00 


Profit  and  loss — surplus  125.00 


Total  liabilities  and  cap- 
ital      $  85,125.00 


98 


Problem  Number  Eleven 


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99 


Elementary  Accounting  Problems 

AMERICAN   CHOCOLATE  COMPANY 

List  op  StockhoivDErs — October  3i»  1912 

Name                                                                      No.  of  Shares 

Henry    Borman    210 

J.  F.  Dominick  60 

R.  E.  Holmes   50 

William   Jennings    no 

James  Phipps    210 

A.  E.  Pratt   100 

James   Power    25 

D.   Read    5 

H.  Robinson    5 

F.  Stone   5 

780 

2.  By  Section  32  of  Stock  Corporation  Law,  New  York,  every  stock 
corporation  must  keep  or  cause  to  be  kept  at  its  principal  office  a  book 
called  the  STOCK  BOOK,  containing  all  names  alphabetically  arranged  of 
stockholders,  places  of  residence,  number  of  shares  held  by  each,  time  when 
they  became  owners,  amount  paid  thereon.  Neglect  to  keep  such  a  Stock 
Book,  imposes  a  penalty  of  $50,  neglect  or  refusal  to  make  proper  entries  in 
same,  neglect  or  refusal  to  exhibit  same  or  allow  same  to  be  inspected  as 
provided  by  said  Section  imposes  a  penalty  on  the  corporation,  or  officer, 
or  agent  thereof  of  $50  for  every  day  of  such  neglect  or  refusal. 


PROBI.EM  No.   II-A 


The  New  York  Tool  Company  was  incorporated  under  the 
laws  of  the  state  of  New  York,  July  i,  19 12,  with  an  authorized 
capital  stock  of  $100,000,  divided  into  1,000  shares  of  the  par 
value  of  $100  each.  The  incorporators,  each  of  whom  subscribed 
and  paid  for  20  shares  of  stock,  were  R.  S.  Savage,  W.  L.  Groves, 
and  S.  B.  Long.  The  organization  tax  and  filing  fees  were 
$53.45.  The  bill  of  the  attorney  for  services  in  connection  with 
incorporation  was  $300.  The  first  three  stock  certificates  were 
issued  to  the  incorporators. 

The  subsequent  transactions  were  as  follows:  July  20th,  C. 
Stevens  bought  100  shares  and  received  certificate  No.  4;  August 
5th,  H.  Tepper  subscribed  for  10  shares  and  paid  50%  on  account 
thereof;  August  17th,  Savage  subscribed  for  100  shares.  Groves 
125  shares,  and  Long  75  shares,  each  paying  50%  on  account; 
August  26th,  certificate  No.  5  for  300  shares  was  issued  to  John 
Thompson  for  land  and  buildings;  September  5th,  bought  ma- 
chinery in  the  amount  of  $12,000,  paying  $8,000  in  cash  and  giv- 
ing note  for  balance;  September  i6th,  certificate  No.  6  for  60 

100 


Problem  Number  Eleven 

shares  issued  to  John  Darby  for  patents;  October  2d,  Stevens 
sold  30  shares  to  M.  McLean  (new  certificates  No.  7  and  No.  8) 
October  4th,  Savage  and  Groves  paid  balance  on  account  of  sub- 
scriptions, in  cash;  Long  paid  part  in  cash  and  gave  a  note  of 
$2,500  for  the  balance;  certificates  No.  9,  No.  10  and  No.  11 
issued  to  the  incorporators;  October  21st,  K.  Libby  subscribed  for 
30  shares,  paying  50%  on  account;  October  23d,  M.  McLean 
sold  10  shares  to  B.  Partridge,  5  shares  to  E.  Flint,  and  5  shares 
to  T.  Porter  (new  certificates  No.  12,  No.  13,  No.  14  and  No.  15 
issued)  ;  October  31st,  Savage  assigned  10  shares  of  stock  to 
B.  Jones :  Tepper  refused  to  make  further  payments  on  his  sub- 
scription and  it  was  cancelled. 
From  the  foregoing  prepare: 

(a)  Formal  journal   entry  opening  the  general   books   and 
journal  entries  for  subsequent  transactions.    , 

(b)  General  balance  sheet,  October  31,  191 2. 

(c)  Stock  book  as  required  by  law. 

(d)  List  of  stockholders,  showing  number  of  shares  held  by 
each,  October  31,  1912. 


lOI 


Elementary  Accounting  Problems 

PROBLEM  No.  12 
Demonstration 

On  April  I,  1912,  W.  B.  Hone,  A.  J.  Hone,  and  F.  G.  Hone, 
all  being  general  partners  in  the  firm  of  L.  B.  Hone's  Sons,  build- 
ing contractors,  decided,  in  order  to  preserve  the  organization  of 
their  business  in  case  of  the  death  of  any  of  the  partners,  to  in- 
corporate. 

Accordingly  they  filed  a  certificate  of  incorporation  with  the 
secretary  of  state  at  Albany,  and  paid  the  organization  tax  and  fil- 
ing fee  in  the  amount  of  $15.75  ($12.50  tax,  $3.25  filing  fees)  out 
of  $500  advanced  by  W.  B.  Hone.  The  par  value  of  the  shares 
was  $100  each. 

The  balance  sheet  of  the  copartnership  was  as  follows :  assets : 
land  and  buildings  (net  value),  $35,000;  machinery  and  tools 
(net  value),  $9,500;  loM  Mich.  Cent.  4's  (cost),  $9,887.50; 
horses,  wagons,  and  harness  (net  value),  $500;  furniture  and 
fixtures  (net  value),  $1,000;  building  materials,  $7,929.04;  con- 
tracts in  progress,  $18,417.23;  cash,  $12,395.84;  accounts  receiv- 
able, $22,486.75;  notes  receivable  and  interest,  $3,025.17;  unex- 
pired insurance,  $425.  Liabilities  and  capital:  taxes  accrued, 
$125;  salaries  and  wages  accrued,  $250;  accounts  payable,  $7,- 
528.82;  capital,  W.  B.  Hone,  $40,237.28;  capital,  A.  J.  Hone, 
$35,182.16;  capital,  F.  G.  Hone,  $37,243.27. 

Upon  the  formation  of  the  corporation  and  the  taking  over  of 
the  business,  each  partner  received  83  1-3  shares  of  stock  and 
notes  bearing  interest  at  the  rate  of  6%  per  annum  for  the  bal- 
ance of  his  capital  account.  The  corporate  name  was  L.  B.  Hone's 
Sons,  Incorporated. 

After  the  new  books  had  been  opened  it  was  discovered  that 
charges  to  contracts  in  the  amount  of  $325.72  had  been  omitted 
from  the  schedule  and  that  $53.75  had  been  omitted  from  the  ac- 
counts payable.  On  April  3d  a  cheque  in  the  amount  of  $100  was 
received  from  the  firm's  brokers  for  interest,  due  April  ist,  which 
had  been  collected  on  the  Mich.  Cent.  4's.  The  cheque  was 
handed  to  W.  B.  Hone. 

102 


Problem  Number  Twelve 

Prepare : 

(a)  Journal  entries  opening  the  books  of  the  corporation. 

(b)  Balance  sheet  of  the  corporation,  April  i,  1912. 

(c)  Skeleton  ledger  accounts  showing  the  closing  of  the  firm's 
books. 

SoiyUTlON  TO  PrOBI^EM  No.  12 

The  problem  presented  herewith  should  be  interesting,  if 
somewhat  novel,  because  of  the  fact  that  it  was  taken  from  actual 
experience.  It  illustrates  one  of  the  peculiar  situations  which  arise 
in  practice. 

Incorporation  was  resorted  to  in  this  case  partly  for  the  pur- 
pose of  preserving  the  organization  against  death  and  partly  to 
avoid  having  any  action  for  employer's  liability  brought  against 
the  individual  members  of  the  firm  by  employees;  also  to  avoid 
any  individual  difficulties  with  labor  unions,  etc. 

Judging  from  the  combined  capital  accounts  of  the  three 
partners  as  shown  by  the  balance  sheet  of  the  copartnership  one 
might  have  expected  the  capital  stock  of  the  corporation  to  have 
been  from  $100,000  to  $125,000.  It  was  pointed  out  by  counsel 
that  such  procedure  would  increase  the  organization  tax  and  the 
subsequent  corporation  taxes  and  that  no  more  would  be  gained 
than  if  the  capital  stock  were  nominal  in  amount.  As  a  conse- 
quence $25,000  was  decided  upon  as  the  amount  at  which  the 
corporation  would  be  capitalized;  the  difference  between  the  par 
value  of  83  1-3  shares  of  stock  and  the  capital  of  each  partner 
being  covered  by  notes  of  the  corporation. 

In  order  that  there  might  be  funds  out  of  which  to  pay  the 
expenses  of  incorporation  one  of  the  partners  advanced  $500.  In 
this  respect  the  same  question  arises  as  in  problem  11,  as  to  how, 
not  having  achieved  existence  the  corporation  could  hold  funds 
and  make  disbursements.  Legally  perhaps  it  could  not.  What 
really  happened  it  seems  was  that  one  of  the  partners  advanced  in 
trust  for  the  proposed  corporation  an  amount  which  was  made 
available  for  disbursements  on  account  of  the  corporation. 

The  entry  affecting  the  receipt  of  cash  for  expenses  and  the 
corresponding  disbursements  might  perhaps  more  properly  be 
made  after  the  formal  entry  opening  the  books,  if  it  were  con- 
tended that  no  expenses  could  arise  until  the  corporate  life  had 

103 


Elementary  Accounting  Problems 

begun.  On  the  other  hand  if  the  entries  were  to  be  made  chrono- 
logically there  could  be  no  question  as  to  the  priority.  So  much 
for  theory.  As  a  matter  of  practice,  one  entry  would  be  made  in 
the  journal  (setting  up  the  capital  stock)  while  the  other  (organ- 
ization expenses,  etc.)  would  be  made  in  the  cash  book.  Both 
would  probably  be  made  as  of  April  i,  1912  and  no  one  could  con- 
sistently complain  thereat. 

Expressed  in  the  form  of  journal  entries  and  using  the  formal 
method  of  recording  the  organization  of  the  company  the  items 
under  discussion  would  appear  as  follows : 

1912 

April  I  Capital  stock  unissued   $25,000. 

To  Capital  stock  authorized $25,000. 

To  record  the  organization  of  L.  B.  Hone's 
Sons,  Incorporated,  incorporated  under  the 
laws  of  the  State  of  New  York  with  an  au- 
thorized capital  stock  of  $25,000  divided  into 
250  shares  of  $100  each. 

Cash SCO. 

To  W.  B.  Hone  500. 

For  cash  advanced  for  expenses  of  organiza- 
tion. 

Organization  expense  15.75 

To  Cash    15.7s 

Following  these  entries  would  come  the  act  of  taking  over  the 
assets  and  liabilities  of  the  copartnership,  and  the  issuing  of  the 
capital  stock  to  the  individuals.  The  entry  recording  same  would 
be  based  on  the  balance  sheet  of  the  copartnership,  substituting 
for  the  capital  accounts  of  the  partners,  the  capital  stock  and  notes 
payable  of  the  corporation. 

The  entry  would  appear  as  below: 

Land   and  buildings    $35»ooo. 

Machinery   and  tools    9»500- 

Horses,  wagons  and  harness  500. 

Furniture  and  fixtures  1,000. 

Mch.  Cent.  4's   (loM)    9,887.50 

Building  materials   7,929.04 

Contracts   in  progress    18,417.23 

Cash       12,39584 

Accounts   receivable 22,486.75 

Notes  receivable  and  interest   3,025.17 

Unexpired    insurance .^      4^5- 

To  taxes  accrued  ~      $     125. 

Salaries  and  wages   accrued 250. 

104 


Problem  Number  Twelve 

Accounts  payable  7,528.82 

Notes  payable   87,662.71 

Capital  stock  25,00a 

I  -» r. 

For  the   assets   and  liabilities  of   L.    B.   Hone's   Sons  \'*''' 

taken    over    by    L.    B.    Hone's    Sons,    Incorporated    in — * — 

exchange  for  capital  stock  and  notes  payable  as  above. 

With  the  exception  of  those  affecting  the  discrepancies  dis- 
covered after  the  books  of  the  corporation  were  opened  the  jour- 
nal entries  are  now  complete.  In  connection  with  the  latter,  it 
may  be  said  that  the  question  of  disposition  of  these  items  is  not 
so  difficult  as  it  would  have  been  had  not  the  parties  in  interest 
have  been  the  same  in  each  organization.  If  the  schedule  repre- 
senting contracts  in  progress  had  been  correct,  it  would  have 
shown  $325.72  more  than  it  did  show.  The  effect  of  this  would 
have  been  to  increase  the  capital  of  the  partners.  Likewise  a 
correct  schedule  of  accounts  payable  would  have  shown  $53.75 
more  than  was  shown,  with  a  corresponding  decrease  in  the 
capital  accounts  of  partners.  The  net  effect  of  these  items  would 
have  been  to  increase  the  capital  $271.97.  If  this  had  been  done, 
the  notes  payable  when  issued  would  have  been  greater  in  amount 
to  that  extent.  For  practical  purposes,  the  error  may  be  cor- 
rected by  distributing  the  amount  among  the  three  interested 
parties  and  issuing  new  notes  for  the  correct  amounts  ($31,- 
994.60,  $26,939.49,  $29,000.59)  issuing  additional  notes  for 
$271.97  ($90.66  each),  or  crediting  the  amount  ($271.97)  to 
accounts  payable,  representing  the  individuals.  The  objection  to 
the  latter  would  be  that  unless  paid  to  the  partners  immediately 
they  would  loose  the  interest  at  6%  to  which  they  are  entitled 
and  which  was  borne  by  the  notes.  It  is  therefore  thought  de- 
sirable to  make  an  entry  as  follows : 

Contracts  in  progress $3^5-7^ 

To  Accounts  payable 53-75 

Notes  payable    $271.97 

From  the  above  entries  the  accounts  may  be  set  up  and  ad- 
justed so  that  the  following  balance  sheet  will  result: 


105 


Elementary  Accounting  Problems 

Iv.  B.  HONE'S  SONS,  INCORPORATED 
Balance  Sheet — April  i,  19 12 


Assets 


Liabilities  and  Capital 


Land  &  buildings $  35,000. 

Machinery  &  tools 9,500. 

Horses,  wagons  &  harness         500. 

Furn.  &  fixtures  1,000 

Mich.  Cent.  4's 

(par  $10,000)    9,887.50 

Working  assets: 

Material  &  sup $    7,929.04 

Invested  in  contracts  . .     18,742.95 

Total  working  assets  $  26,671.99 

Current  assets: 

Cash  $  12,880.09 

Accounts  rec 22,486.75 

Notes  rec.  &  int 3,025.17 

Total  current  assets  $  38,392.01 

Deferred  charges  to  ex- 
pense : 

Unexp.  insurance $       425. 

Organization  exp 15.75 

Total        deferred 
charges  to  exp $       440.75 

Total  assets  $121,392.25 


Capital  stock  outstanding  $  25,000.00 

Notes  payable  87,934.68 

Current  liabilities : 

Taxes  accrued $       125. 

Sal.  &  wages  ace 250. 

Accounts  payable 8,082.57 

Total  current  Iblts.  .  .$    8,457.57 


Total    liabilities    and 
capital    $121,392.25 


The  problem  calls  for  skeleton  ledger  accounts  showing  the 
closing  of  the  firm's  books.  Since  what  is  true  of  one  asset  ac- 
count is  true  of  all  asset  accounts  in  this  particular  case — and 
the  same  may  be  said  of  the  liabilities — it  is  thought  that  time 
and  labor  may  be  saved  if  the  assets  are  represented  collectively 
and  respectively  by  single  accounts  called  "copartnership  assets" 
and  "copartnership  liabilities."  In  following  the  entries  it  may 
help  if  it  is  known  that  the  assets  and  liabilities  were  first  debited 
and  credited  respectively  to  L.  B.  Hone's  Sons,  Incorporated ;  that 
account  was  closed  when  the  capital  stock  and  notes  were  re- 

106 


Problem  Number  Twelve 


ceived;  the  latter  two  accounts  were  closed  when  the  stock  and 
notes  were  distributed  among  the  partners. 


Copartnership  assets 


$120,566.53     I    $120,566.53 
L.  B.  Hone's  Sons,  Inc. 


Copartnership  liabilities 

$7,903.82       I  $7,903.82 

W.  B.  Hone,  Capital 


Assets   $120,566.53 
Contr's.        325.72 

Liabs.   $7,903.82 
A/cpay.      53.75 
Capital 

stk.    25,000. 
Notes   87,934.68 

$120,892.25 
B.  H.  Sons  Inc. 

Stock 
Notes 

•.$  ^,333-33 
..  31,994.60 

$40,237.28 
90.65 

$40,327.93 

$40,327.93 

A.  J.  Horn 

$120,892.25 
Capital  Stock  I. . 

',  Cnpital 

$25,000.                  $25,000. 

Stock 
Notes 

..$  8,333-33 
..  26,939-49 

$35,182.16 
90.66 

Notes  payable  L.  B.  H.  Sons  Inc. 

,$35,272.82 
F.  G.  Horn 

$35,272.82 
7,  Capital 

$87,94368               $87,943.68 

Stock 
Notes 

.$  8,333-33 
.  29,000.59 

^37,24327 
90.66 

$37,333-92 

$37,333-93 

Probi^km  No.  12-A  (Practice) 

In  order  to  avoid  personal  liability  the  firm  of  Smith  Brothers, 
comprised  of  A.  L.,  B.  M.,  and  C.  N.  Smith,  incorporated  in  New 
York,  on  July  i,  19 12,  under  the  title  of  Smith  Brothers,  Incor- 
porated with  an  authorized  capital  of  $50,000,  divided  into  500 
shares  of  the  par  value  of  $100  each.  A.  L.  Smith  advanced  $1,- 
000  for  expense.  The  organization  tax  and  filing  fees  were 
$28.75  J  legal  expenses  paid  in  connection  with  incorporation,  $300. 

The  balance  sheet  of  the  copartnership  was  as  follows:  As- 
sets, investments,  $14,962.50;  notes  receivable  and  interest,  $8,- 
025;  furniture  and  fixtures,  $2,000;  accounts  receivable,  $18,- 
946.25 ;  land  and  buildings,  $50,000 ;  materials  and  supplies,  $12,- 

107 


Elementary  Accounting  Problems 

483.12;  equipment,  $15,000;  insurance  unexpired,  $250;  cash, 
$10,573.43;  motor  trucks,  $5,000;  goods  in  process,  $20,318.79. 
Liabilities  and  capital;  bond  and  mortgage  payable  and  interest 
$10,300;  taxes  accrued,  $275;  salaries  and  wages  accrued,  $1,250; 
accounts  payable  $18,496.27;  notes  payable  and  interest  $10,125; 
proprietorship,  A.  L.  Smith,  $50,000;  B.  M.  Smith,  $45,321.16; 
C.  N.  Smith,  $21,791.66. 

When  the  business  was  transferred  to  the  corporation  each 
partner  received  $166  2-3  shares  of  stock  and  notes  for  the  balance 
of  his  investment. 

From  the  foregoing  prepare : 

(a)  Journal  entries  opening  the  books  of  the  corporation. 

(b)  Balance  sheet  of  the  corporation,  July  i,  1912. 

(c)  Skeleton  ledger  accounts  showing  the  closing  of  the  co* 
partnership  books. 


108 


Problem  Number  Thirteen 

PROBLEM  No.  13 
Demonstration 

The  Hackett  Novelty  Company  was  organized  on  January  i, 
191 2,  under  the  laws  of  the  state  of  New  York,  with  an  author- 
ized capital  stock  of  $5oo,0(X)  divided  into  2,500  shares  of  pre- 
ferred stock  of  the  par  value  of  $100  each  and  5,000  shares  of 
common  stock  of  the  par  value  of  $50  each. 

At  the  first  meeting  of  the  directors  a  proposition  was  re- 
ceived from  Jones  and  Hackett,  a  copartnership  trading  under 
said  name,  whereby  it  was  proposed  to  transfer  the  business 
property  and  goodwill  of  the  copartnership,  except  cash,  to  the 
corporation,  for  and  in  consideration  of  the  sum  of  $400,000  to 
be  paid  in  the  capital  stock  of  the  corporation,  $250,000  in  pre- 
ferred stock  and  $150,000  in  common  stock,  the  corporation  to 
assume  all  the  debts  in  connection  with  said  business.  The  propo- 
sition was  accepted  by  the  directors  and  the  value  of  the  busi- 
ness acquired  fixed  by  them  at  $400,000. 

From  the  schedules  of  assets  and  liabilities  the  following  ac- 
counts were  opened  by  the  corporation :  land  and  buildings,  $100,- 
000;  equipment;  $25,000;  motor  truck,  $6,000;  furniture  and  fix- 
tures, $8,000;  investments,  $50,000;  materials  and  supplies,  $15,- 
963.21;  goods  in  process,  $32,813.97;  finished  goods,  $25,195.64; 
accounts  receivable,  $47,972.13 ;  notes  receivable  and  interest,  $10,- 
125 ;  insurance  unexpired,  $475 ;  bond  and  mortgage  payable  and 
interest,  $30,450 ;  taxes  accrued,  $780 ;  salaries  and  wages  accrued, 
$3,265 ;  accounts  payable,  $49,607.52 ;  notes  payable  and  interest, 
$20,225.72. 

Of  the  common  stock  remaining  after  the  issue  of  that  to 
Jones  and  Hackett,  1,200  shares  were  sold  to  various  persons  for 
cash,  out  of  which  $1,000  was  paid  to  an  attorney  for  organization 
taxes,  filing  fees,  and  expenses. 

From  the  above  prepare : 

(a)  Pro-forma  journal  entry  opening  the  books,  followed 
by  journal  entries  expressing  the  subsequent  transactioas. 
109 


Elementary  Accounting  Problems 

\h)  General  balance  sheet  of  the  corporation  after  the  entries 

have  been  made. 
(c)   Skeleton  ledger  accounts  showing  the  closing  of  the  firm's 

books. 
Note :  According  to  the  balance  sheet  of  the  firm  on  Decem- 
ber 31,  191 1,  the  assets  were  $354,328.24;  the  Habilities,  $104,- 
328.24;  capital,  A.  Jones,  $150,000,  B.  Hackett,  $100,000.     The 
partners  divided  profits  and  losses  in  proportion  to  investment. 

S01.UT10N  TO  Proble:m  No.  13 

The  method  of  treating  the  capital  stock  in  this  solution  dif- 
fers from  that  in  problem  No.  ii  in  that  no  cognizance,  in  so  far 
as  the  money  value  is  concerned,  is  taken  of  the  capital  stock 
until  same  is  issued.  A  memorandum  or  pro-forma  entry  is 
made  to  record  the  organization  of  the  company  and  to  give  the 
details  concerning  the  amount,  number  of  shares  and  par  value  of 
the  capital  stock  authorized.  The  first  entry  affecting  the  capital 
stock  account  on  the  general  ledger  is  made  in  connection  with  the 
purchase  of  the  business  property  and  goodwill  of  the  copartner- 
ship of  Jones  &  Hackett.  Subsequent  entries  are  made  in  the 
capital  stock  account  in  connection  with  the  sale  of  1,200  shares 
of  the  common  stock  for  cash.  The  capital  stock  accounts, 
namely,  preferred  and  common,  show  only  the  capital  stock  out- 
standing. The  capital  stock  authorized  is  not  shown  in  any  way 
on  the  general  books.  The  disadvantages  of  the  pro-f  orma  method 
were  discussed  in  problem  No.  11. 

In  connection  with  the  purchase  of  the  business  property  and 
goodwill  of  Jones  &  Hackett,  an  account  called  "Plant  and  Sun- 
dry Assets"  is  charged  with  the  amount  of  the  purchase  price 
agreed  upon.  Jones  &  Hackett  as  vendors  are  credited  with  the 
amount.  It  will  be  noted  in  the  journal  entry  covering  this  trans- 
action that  the  directors  have  fixed  the  value  of  the  business  ac- 
quired at  $400,000.  This  is  in  order  that  the  stock  issued  for 
said  property  may  be  fully  paid  and  not  liable  to  any  further 
call.  In  New  York  state  the  judgment  of  the  directors,  in  the 
absence  of  fraud  in  the  transaction,  is  conclusive  as  to  the  value 
of  the  property  purchased.  The  law  further  states,  "In  all 
statements  and  reports  of  the  corporation,  by  law  required  to  be 
published  or  filed,  this  stock  shall  not  be  stated  or  reported  as 

no 


Problem  Number  Thirteen 

being  issued  for  cash  paid  *  *  *  but  shall  be  reported  as 
issued  for  property  purchased." 

For  the  purpose  of  getting  the  assets  and  liabilities  on  the 
books  in  detail,  it  becomes  necessary  to  distribute  the  plant  and 
sundry  assets  account.  From  the  schedules  of  assets  and  liabil- 
ities acquired  and  taken  over  it  will  be  seen  that  the  assets  amount 
to  $321,544.95  while  the  liabilities  amount  to  $104,328.24.  Thus 
the  value  of  the  net  assets  taken  over  is  found  to  be  $217,216.71. 
For  these  the  corporation  apparently  paid  $400,000.  The  differ- 
ence between  the  net  assets  and  this  amount,  namely,  $182,783.29 
must  be  attributed  to  goodwill,  and  the  goodwill  account  is  there- 
fore set  up  in  this  amount.  It  is  not  the  intention  of  the  author 
either  to  approve  or  disapprove  of  this  procedure  nor  to  discuss 
the  question  of  whether  or  not  the  goodwill  is  worth  the  amount 
at  which  it  is  shown.  The  purpose  is  rather  to  illustrate  one  of 
the  various  procedures  resorted  to  in  the  treatment  of  goodwill. 

The  remaining  entries  and  statements  required  by  the  prob- 
lem will  presumably  need  no  discussion  with  the  exception  of  the 
skeleton  ledger  accounts  showing  the  closing  of  the  firm's  books 
after  the  sale  had  taken  place  and  settlement  had  been  made  by 
the  corporation.  Comparing  the  assets  taken  over  by  the  cor- 
poration with  the  assets  stated  as  having  appeared  on  the  balance 
sheet  of  the  firm  on  December  31,  191 1,  a  discrepancy  will  be 
noted  while  the  liabilities  agree.  In  this  connection  attention  is 
invited  to  the  fact  that  the  corporation  purchased  the  property 
and  goodwill  of  the  copartnership  except  cash.  It  would  thus 
seem  logical  to  attribute  the  difference  to  the  cash  which  was 
not  transferred.  This  might  give  rise  to  the  question  concern- 
ing the  distribution  of  the  assets  as  to  whether  or  not  the  cash 
should  not  first  be  taken  out  and  distributed  between  the  part- 
ners. This  of  course  might  be  done  but  it  would  seem  to  be 
unnecessary  since  if  it  were  done,  the  cash  would  be  distributed 
in  the  proportions  of  investment  and  nothing  would  be  gained  by 
making  a  separate  transaction  of  it  since  profits  and  losses  as 
well  as  net  assets  resulting  in  this  particular  case  were  divided  be- 
tween the  partners  in  accordance  with  their  respective  investments. 

January  i,  1912. 
To  record  the  organization  of  The  Hackett  Novelty- 
Company,    incorporated   under   the   laws   of   the 
state  of  New  York  on  January  i,  1912  with  an 

III 


Elementary  Accounting  Problems 

authorized  capital  stock  of  $500,000  divided  into 
2,500  shares  of  preferred  of  the  par  value  of 
$100  each  ($250,000)  and  5,000  shares  of  common 
of  the  par  value  of  $50  each  ($250,000),  this  entry- 
is  made. 

Plant  and  sundry  assets  $400,000.00 

To  Jones  &  Hackett,  vendors  $400,000.00 

For  the  business  property  and  goodwill  of 
Jones  and  Hackett,  a  copartnership,  pur- 
chased from  said  parties  for  the  sum  of 
$400,000,  in  accordance  with  proposal  and  ac- 
ceptance of  January  i,  1912,  which  sum  was 
fixed  by  the  directors  of  The  Hackett 
Novelty  Company  as  the  value  of  said 
property  and  goodwill,  payment  to  be  made 
in  capital  stock  of  The  Hackett  Novelty 
Company  as  follows. 

Preferred  stock  2,500  shares.  $250,000.00 
Common  stock     3,000      "  150,000.00 

$400,000.00 

Jones  &  Hackett,  vendors 400,000.00 

To  Preferred  capital  stock  outstanding  ....  250,000.00 

Common  capital  stock  outstanding  ....  150,000.00 

To  record  the  settlement  with  Jones  & 
Hackett,  vendors,  in  accordance  with  the 
terms  of  contract  above  set  forth. 

Land  and  buildings ^..^ ^ . . .  100,000.00 

Equipment 25,000.00 

Motor  truck    6.000.00 

Furniture  and  fixtures  8,000.00 

Investments 50,000.00 

Materials  and  supplies  15,963.21 

Goods  in  process 32,813.97 

Finished  goods  25,195.64 

Accounts  receivable 47,972.13 

Notes  receivable  and  interest 10,125.00 

Insurance  unexpired  475-00 

Goodwill 182,783.29 

To  Bond  and  mortgage  payable  and  interest  30,450.00 

Taxes  accrued    780.00 

Salaries  and  wages  accrued  3,265.00 

Accounts  payable  49,607.52 

Notes  payable  and  interest ^0,^225.72 

Plant  and  sundry  assets  400,060.00 

To  distribute  the  plant  and  sundry  assets 
account. 

Cash   60,000.00 

To  Common  capital  stock  outstanding 6o,000.00 

For  1,200  shares  of  common  stock  sold  at 
par. 

112 


Problem  Number  Thirteen 


Organization  expense  i,ooo.oo 


To  Cash 


1,000.00 


Payment  to  attorney  for  incorporation  tax, 
filing  fees  and  sundry  expenses  incident  to 
organization. 

THE  HACKETT  NOVELTY  CO. 

General  Balance  Sheet — ^January  i,  1912 


Assets 


Land  and  buildings $100,000.00 


Equipment   25,000.00 


Motor  trucks 6,000.00 


Furniture  and  fixtures..      8,000.00 


Investments  50,000.00 


Goodwill  182,783.29 


Working  and  trading  as- 
sets: 
Materials  and  supplies  $  15,963.21 

Goods  in  process   32,813.97 

Finished  goods 25,195.64 


Total    working    and 
trading  assets  ....$  73,972.82 


Current  assets: 

Cash $  59,000.00 

Accounts  receivable   .  •     47,972.13 
Notes    receivable    and 
interest 10,125.00 


Total  current  assets. $117,097.13 


Deferred  charges  to  ex- 
pense : 
Insurance  unexpired  ..$       475.00 
Organization  expense..       1,000.00 


Total    deferred 
charges  to  expense. $    1,475,00 


iTotal  assets .$564,328.24 


Liabilities  and  Capital 


Capital  stock  outstanding : 

Preferred  $250,000.00 

Common  210,000.00 


Total     capital     stock 
outstanding $460,000.00 


Bond  and  mortgage  pay- 
able and  interest 30450.00 


Current  Liabilities:  * 

Taxes  accrued $       780.00 

Salaries  and  wages  ac- 
crued         3,265.00 

Accounts  payable 49,607.52 

Notes  payable  and  in- 
terest       20,225.72 


Total  current  liabil- 
ities   $  73,878.24 


Total    liabilities    and 
capital   $564,328.24 


113 


Elementary  Accounting  Problems 


Skeleton  Ledger  Accx)unts  Showing  the  Cwsing  of  the  Firm's  Books, 

After  the  Sale 

Assets  Liabilities 

?354,32«.24  \F.&h $354,32«.24      P.  &  L $I04,32«.24  |  $104,328.24 

The  Hackett  Novelty  Company  Securities 

Sale  .  .$400,000.00  I  Secur-  H.N. Co.  $400,000!  Jones.  .$240,000.00 

ities  $400,000.00  1  Hackett  160,000.00 

PROFIT  AND  LOSS 


Assets    $354,328.24 

Jones    90,000.00 

Hackett  60,000.00 


$504,328.24 


Liabilities   $104,328.24 

H.N.Co 400,000.00 


$504,328.24 


A.  Jones 


B.  Hackett 


Secur- 
ities   $240,000.00 


$240,000.00 


Secur- 
Bal.  $150,000.00    ities  $160,000.00 
P&L  90,000.00 


$240,000.00 


$160,000.00 


Bal.  $100,000.00 
P&L  60,000.00 


$160,000.00 


PROBI.EM  No.  13-A  (Practice) 


The  Classical  Book  Company,  a  corporation  organized  and 
existing  under  the  laws  of  the  state  of  New  York,  having  filed  its 
charter  on  July  i,  1912,  which  charter  authorized  preferred 
capital  stock,  1,250  shares,  $100  each,  and  common  capital  stock, 
2,500  shares,  $50  each,  receives  a  proposition  from  Benedict  and 
Selleck  whereby  said  parties  agree  to  transfer  all  the  property, 
business,  and  goodwill,  except  cash  of  the  firm  of  Benedict  and 
Selleck  in  consideration  of  all  the  capital  stock  of  The  Classical 
Book  Company,  said  corporation  to  assume  all  debts  of  the  firm. 
The  proposition  was  accepted  and  the  value  of  the  property  ac- 
quired fixed  by  the  directors  at  $250,000. 

Benedict  advanced  $10,000  in  cash,  taking  the  corporation's 
note.  The  assets  and  liabilities  acquired  were  valued  in  detail 
as  follows:  land  and  buildings,  $75,000;  machinery,  tools,  etc., 
$18,000;  horses,  wagons  and  harness,  $2,500;  furniture  and  fix- 
tures, $5,000;  Atlantic  Coast  Line  4's,  $15,000;  paper  stock  and 
supplies,  $20,782.13;  work  in  process,  $15,951.46;  books,  $35,- 

114 


Problem  Number  Thirteen 

864.17;  accounts  receivable,  $13,326.19;  notes  receivable  and  in- 
terest, $5,012.50;  advertising  unused,  $325;  bond  and  mortgage 
payable  and  interest,  $15,125;  taxes  accrued,  $250;  salaries  and 
wages  accrued,  $1,875;  accounts  payable,  $43,046.13;  notes  pay- 
able and  interest,  $30,247.79. 

The  balance  sheet  of  Benedict  and  Selleck  on  June  30,  1912, 
showed   assets,   $215,543.92;   liabilities,   $90,543.92;   capital,   A. 
Benedict,  $100,000;  B.  Selleck,  $25,000.    Profits  and  losses  were 
distributed  in  proportion  to  investments. 
Prepare : 

(a)  Pro-forma  journal  entry  opening  the  books  of  the  cor- 
poration,  followed  by  journal  entries  to  record  the  sub- 
sequent transactions. 
(J?)  General  balance  sheet  of  the  corporation  after  the  en- 
tries have  been  made. 
{c)  Skeleton  ledger  accounts  showing  the  closing  of  the 
firm's  books. 


"5 


Elementary  Accounting  Problems 

PROBLEM  No.  14 
Demonstration 

The  Hampton  Circle  Swing  Company  was  organized  in  New 
York  on  April  i,  19 12,  with  an  authorized  capital  stock  of 
$500,000,  divided  into  5,000  shares  of  the  par  value  of  $100  each. 
The  certificate  of  incorporation  was  filed  April  5th. 

At  a  meeting  of  the  directors  held  on  April  6th,  there  was 
acquired  from  W.  J.  Hampton  at  a  valuation  of  $500,000,  all  his 
right,  title  and  interest  in  various  patents  held  by  him  on  the 
Hampton  Circle  Swings. 

In  order  to  raise  funds  with  which  to  exploit  the  invention 
Mr.  Hampton  donated  to  the  company  2,499  shares  of  stock. 
Of  this  2,250  shares  were  sold  from  time  to  time  at  an  average 
price  of  90,  and  225  shares  were  used  in  giving  a  bonus  of  10% 
in  stock. 

The  parts  necessary  to  erect  and  equip  three  swings  were 
purchased  from  the  Danielson  Iron  Company.  The  cost  was 
$73,247.92,  of  which  $50,000  was  paid  in  cash.  The  labor  inci- 
dent to  erection  was  paid  for  in  cash  and  amounted  to  $45,386.58. 
One  swing  was  installed  at  Coney  Island  at  a  cost  of  $39,544.83 ; 
one  at  Atlantic  City  at  a  cost  of  $41,275.17;  and  one  at  Fort 
George  at  a  cost  of  $37,814.50.  The  privileges  cost,  collectively, 
$12,000.  The  net  income  from  the  operation  of  the  swings  for 
the  season  was:  Coney  Island,  $12,273.85  (sold  before  Labor 
Day  for  $50,000)  ;  Atlantic  City,  $2,863.15  (installation  not  com- 
pleted until  after  July  4th)  ;  Fort  George,  $6,743.35.  The  salaries 
and  expenses  of  the  company  from  April  i  to  September  30, 
1912,  were  $18,787.59.  The  balance  on  account  was  paid  to  the 
Danielson  Iron  Company  and  $2,000  was  paid  for  a  privilege  at 
Ocean  City  for  the  season  of  191 3. 

Prepare : 

(a)  Journal  entries  opening  the  books  of  The  Hampton  Circle 
Swing  Company  and  covering  subsequent  transactions. 

(Jb)  Balance  sheet,  September  30,  1912. 

116 


Problem  Number  Fourteen 
S01.UT10N  TO  Probi:.e:m  No.  14 

It  is  probable  that  circle  swings  are  sufficiently  familiar  to 
the  average  reader  to  require  no  description.  They  have  sprung 
into  existence  and  attained  popularity  within  the  past  fifteen 
years.  They  are  now  an  important  feature  of  most  modern 
amusement  parks. 

This  problem  is  taken  from  a  company  which  was  organized 
by  the  man  who  it  is  understood  was  the  inventor  of  the  circle 
swing  and  is  largely  based  on  facts.  It  illustrates  the  ingenuity 
of  an  inventor  who  was  an  organizer  and  man  of  business 
ability  as  well  as  a  mechanical  genius. 

With  a  sufficiency  of  patents  and  no  funds,  this  man,  who 
for  our  purposes  may  be  called  "Hampton,"  set  about  to  organize 
a  corporation  and  acquire  the  entire  capital  stock  thereof  in  ex- 
change for  his  patents.  The  details  of  organization,  such  as  the 
paying  in  of  the  small  amount  of  cash  required  and  the  matter 
of  organization  expense  may  be  passed  over  since  such  points 
have  been  fully  discussed  in  previous  problems  and  the  purpose 
of  the  present  problem  is  to  bring  out  other  points. 

With  the  donation  by  Hampton  of  2,499  shares  of  stock  we 
are  brought  face  to  face  with  the  first  debatable  point.  Pre- 
sumably no  one  will  dispute  the  fact  that  the  stock,  from  the 
standpoint  of  the  company,  becomes  treasury  stock,  since  it 
complies  with  the  usual  interpretation  of  the  term  which  holds 
that  treasury  stock  is  such  stock  as  has  been  once  issued  for 
value  and  subsequently  acquired.  Parenthetically  it  may  be 
noted  that  Hampton  while  having  provided  stock  which  may  be 
sold  at  whatever  price  it  will  bring,  or  if  desirable,  given  away, 
has  not  parted  with  the  controlling  interest  in  the  corporation. 
It  is  also  apparent  that  his  object  in  donating  the  stock  was  to 
provide  what  may  be  rather  loosely  termed  "working  capital." 

On  the  question  of  what  account  title  or  interpretation  shall 
be  given  to  the  credit  which  arises  when  treasury  stock  is  debited, 
authors,  authorities  and  novices  differ.  It  has  been  variously 
referred  to  as  "stock  donation  account,"  "treasury  stock  do- 
nated," "treasury  stock  suspense,"  "working  capital,"  "capital 
surplus  suspense,"  "surplus  from  donated  stock,"  etc.  A  consid- 
eration of  what  it  is  rather  than  what  it  is  called  will  doubtless 
be  of  some  interest. 

117 


Elementary  Accounting  Problems 

The  capital  stock  in  the  amount  of  $500,000  was  originally- 
issued  for  patents.  Were  the  patents  worth  $500,000?  Future 
operations  of  plants  and  income  derived  therefrom  only  will 
answer  such  a  question.  If  in  the  judgment  of  the  directors, 
this  being  a  New  York  corporation,  such  was  the  value,  their 
judgment  in  the  absence  of  fraud  would  be  conclusive.  If  it 
is  conceded  that  $500,000  was  the  value  of  the  patents,  any 
subsequent  donation  of  stock  would  affect  the  surplus  to  the 
extent  of  the  value  of  the  stock.  The  question  of  this  value  then 
becomes  the  second  question  to  be  settled. 

Any  attempt  to  fix  or  estimate  the  value  of  the  donated 
treasury  stock  would  encounter  ridicule.  Obviously  it  is  worth 
what  it  will  bring  upon  sale.  It  is  therefore  apparent  that  some 
temporary  disposition  must  be  made  of  the  credit  if  an  account  is 
to  be  set  up  for  the  treasury  stock.  Of  the  titles  mentioned  all 
are  available  except  "surplus  from  donated  stock."  It  should  in 
the  opinion  of  the  author  be  pointed  out  that  this  is  not  yet 
surplus.  It  is  merely  a  bookkeeping  account  set  up  as  an  expe- 
dient for  holding  the  amount  in  suspense  until  the  exact  amount 
of  the  surplus  arising  from  the  donation  is  determined.  For 
this  purpose,  "stock  donation  account"  perhaps  serves  as  well  as 
any  other. 

In  the  problem  under  discussion,  when  the  donated  stock  is 
received,  treasury  stock  may  be  debited  in  the  amount  of 
$249,900  and  "stock  donation  account"  credited.  When  the 
2,250  shares  are  sold  at  90,  and  225  shares  given  away  as  a 
bonus,  treasury  stock  should  be  credited  in  the  amount  of 
$247,500,  and  cash,  $202,500,  discount  on  stock,  $22,500,  and 
stock  bonus,  $22,500,  respectively,  debited.  The  accounts  for 
discount  and  stock  bonus  might  then,  if  it  were  desired  to  close 
the  books,  or  set  up  a  comprehensive  balance  sheet,  be  closed  out 
to  the  stock  donation  account,  the  balance  of  which  ($202,500), 
after  bringing  down  an  amount  corresponding  to  the  inven- 
tory of  treasury  stock  ($2,400),  could  be  closed  out  to  cap- 
ital surplus  or  to  profit  and  loss  surplus.  The  former  would 
not  be  available  for  dividends  while  the  latter  would  be.  So  far 
as  the  author  has  been  able  to  ascertain  after  energetic  research, 
there  is  no  legal  restriction  upon  treating  such  an  item  as  profit 
and  loss  surplus.  So  to  treat  it,  however,  and  pay  it  out  as 
cash  dividends  would  defeat  the  purpose  of  the  donation.    To  its 

118 


Problem  Number  Fourteen 

distribution  as  stock  dividends  there  could  apparently  be  no 
objection. 

Up  to  this  point  the  question  at  issue  has  been  presented  from 
one  point  of  view — that  point  of  view  being  taken  by  those  who 
would  contend  that  the  patents  could  be  consistently  valued  at 
$500,000.  With  a  view  to  full  discussion,  it  should  be  pointed 
out  that  those  who  oppose  this  view  hold  that  the  donation  of 
the  stock  is  in  itself  evidence  that  the  assets  acquired  should 
not  be  valued  at  the  par  value  of  the  capital  stock  issued  for 
them.  The  treatment  of  the  accounts  in  this  case  would  be  the 
same  as  previously  presented  except  that  the  amount  previously 
credited  ultimately  to  capital  surplus  or  profit  and  loss  surplus 
would  be  credited  to  patents,  thereby  reducing  the  book  value  of 
the  asset.  This  treatment  it  seems  cannot  be  consistently  applied 
if  the  directors  hold  to  the  contrary  through  their  right  to  fix 
the  value,  but  such  procedure  would  undoubtedly  be  conserva- 
tive. 

Still  another  theory  concerning  the  matter  holds  that  the 
donation  of  stock  is  equivalent  to  discounting  the  capital  stock 
and  such  theorists  would  debit  discount  on  stock  and  credit  pat- 
ents in  the  amount  of  the  donation.  One  of  the  earlier  legal 
decisions  in  the  matter  holds  such  a  transaction  to  be  evidence 
of  discount,  or  issue  below  par ;  but  the  courts  have  latterly  held 
the  contrary.  If  such  an  entry  as  was  above  noted  should 
be  made  it  is  evident  that  treasury  stock  would  not  appear  on 
the  books,  but  that  sales  of  the  stock  would  be  debited  to  cash 
and  credited  to  discount  on  stock.  It  is  presumed  that  the  bal- 
ance of  the  discount  account  would  be  written  off  against  profits 
over  a  period  of  years. 

The  journal  entries  required  by  the  problem  are  as  follows : 

Patents    $500,000.00 

To  capital  stock  outstanding  $500,000.00 

Treasury  stock   249,900.00 

To  stock  donation  account  249,900.00 

Cash   202,500.00 

Discount  on  stock   22,500.00 

Stock  bonus 22,500.00 

To  treasury  stock 247,500.00 

Stock  donation  account  247,500.00 

To  discount  on  stock  22,500.00 

Stock  bonus   22,500.00 

Capital  surplus  202,500.00 

119 


Elementary  Accounting  Problems 


Cost  of  swings  118,634.50 

To  accounts  payable  

Cash 

Accounts  payable  50,000.00 

To   cash 

Privileges  (1912)   12,000.00 

To  cash  

Cash  21,880.35 

To  income   from  swings    

Coney  Island $12,273.85 

Atlantic  City  2,863.15 

Fort  George   6,743.35 


$21,880.35 

Cash  50,000.00 

To  cost  of  swings  

Profit  and  loss  

Salaries  and  expenses  18,787.59 

To  cash 

Accounts  payable 23,247.92 

To  cash 

Privileges  (1913)   2,000.00 

To  cash  

Capital  surplus  29,41 1.76 

Profit  and  loss  30,787,59 

To  privileges  ( 1912)  

Salaries  and  expenses   

Patents — written  off  

Income  from  swings 21,880.35 

To  profit  and  loss  

Profit  and  loss  i,S47-93 

To  profit  and  loss  surplus 

THE    HAMPTON    CIRCLE    SWING    CO. 

Balance  Sheet — September  30,  19 12 


73,247.92 
45.386.58 


50,000.00 
12,000.00 
21.880.35 


39,544.83 
10,455.17 

18,787.59 

23,24792 

2,000.00 


12,000.00 
18,787.59 
29,411.76 


21,880.35 
1,547.93 


Assets 


Equipment  (cost)    $79,09.67 

Patents    470,588.24 

Treasury  stock 2,400.00 

Cash 122,958.26 

Privileges   (1913)    2,000.00 


Total  assets $677,036.17 


Liabilities  and  Capital 


Capital    stock    outstand- 
ing  $500,000.00 

Stock  donation  account.  .       2,400.00 

Capital  surplus 173,088.24 

Profit  and  loss  surplus..       1,547.93 


Total  liabilities  and 
capital  $677,036.17 


120 


Problem  Number  Fourteen 
PROBI.EM  No.  14- A  (Practice) 

The  Roller-Coaster  Company  was  incorporated  January  i, 
1912,  under  the  laws  of  the  state  of  New  York,  with  an  author- 
ized capital  stock  of  $750,000,  divided  into  5,000  shares  of  pre- 
ferred and  2,500  shares  of  common  stock  of  the  par  value  of 
$100  each. 

The  stock  was  all  issued  to  Frederick  Jolinson  for  patents. 
Johnson  donated  the  common  stock  for  working  capital.  Ninety 
per  cent  of  it  was  sold  at  an  average  price  of  85. 

Three  outfits  were  erected  as  follows:  Coney  Island,  cost 
$60,827.92;  Midland  Beach,  cost  $61,382.43;  Glen  Island,  cost 
$59,783.47.  The  cost  is  composed  of  material  obtained  from 
sundry  creditors  in  the  amount  of  $120,421.78  (of  which  $97,- 
421.78  was  paid  in  cash),  and  labor  of  installation,  $61,572.04. 

Privileges  cost  $8,750.  The  net  income  from  operation  for 
the  season  was:  Coney  Island,  $8,762.50;  Midland  Beach, 
$5^327.90;  Glen  Island,  $2,275.85.  A  privilege  at  Old  Orchard 
for  the  season  of  191 3  was  purchased  for  $500.  The  salaries 
and  expenses  of  the  company  from  January  ist  to  September  30th 
were  $22,836.79. 

Prepare : 

(a)  Journal  entries  opening  the  books  and  covering  subse- 
quent transactions. 

{b)  Balance  sheet,  September  30,  1912. 


121 


Elementary  Accounting  Problems 

PROBLEM  No.  15 
Demonstration 

The  following  is  a  trial  balance  of  The  Cotton  Seed  Oil  Com- 
pany, September  30,  1912,  after  closing: 

Land  and  buildings,  $1,275,946.27;  equipment,  $348,727.43; 
horses,  wagons,  and  motor  trucks,  $12,872.51;  furniture  and 
fixtures,  $15,269.50;  investments,  $200,000;  materials  and  sup- 
plies, $65,138.79;  goods  in  process,  $25,591.46;  finished  goods, 
$45,468.71;  cash,  $68,649.52;  accounts  receivable,  $125,279.34; 
notes  receivable  and  interest,  $41,286.39;  sinking  fund  for  re- 
demption of  first  mortgage  bonds,  $207,667.95;  first  mortgage 
bonds  purchased  out  of  sinking  fund  (87  at  an  average  price  of 
102^),  $89,175;  deferred  charges  to  expense,  $12,813.97;  first 
mortgage  bonds  payable,  $300,000  (dated  October  i,  1892,  due 
Ocotober  i,  191 2,  interest  six  per  cent,  payable  April  i  and  Octo- 
ber I,  last  paid  April  i,  1912)  ;  taxes  accrued,  $14,025;  salaries 
and  wages  accrued,  $18,927.34;  accounts  payable,  $87,316.75; 
notes  payable  and  interest,  $51,487.63;  interest  accrued  on  first 
mortgage  bonds,  $9,000;  reserve  for  depreciation  of  plant  and 
equipment,  $142,305.12;  reserve  for  sinking  fund,  $210,825;  Pre- 
ferred capital  stock  issued  and  outstanding,  $1,000,000;  com- 
mon capital  stock  issued  and  outstanding,  $500,000;  profit  and 
loss  surplus,  $200,000. 

The  sinking  fund  has  been  accumlated  by  a  semi-annual 
deposit  scientifically  calculated,  and  the  reserve  for  the  sinking 
fund  has  been  created  out  of  profits.  The  entry  affecting  the 
reserve  for  the  six  months  ended  September  30,  1912,  has  been 
made,  but  the  final  sinking  fund  deposit  has  not  been  made.  The 
bonds  were  taken  up  and  cancelled  as  of  October  I,  191 2. 

The  company  issues  as  of  October  i,  191 2,  a  new  series  of 
300  ten-year  gold  bonds  which  bear  interest  at  five  per  cent, 
have  a  sinking  fund  provision,  and  the  reserve  for  the  sinking 
fund  is  to  be  created  out  of  profits  as  before.  Sinking  fund 
deposits  are  to  be  made  quarterly  instead  of  semi-annually.  The 
amount  deposited  December  31,  1912,  was  $6,136.68.     The  in- 

122 


Problem  Number  Fifteen 

tercst  allowed  on  the  deposit  by  the  sinking  fund  depository 
to  March  31,  1913,  was  $61.36.  The  amount  deposited  March  31, 
1913,  was  $6,136.68. 

Prepare : 

(o)  Journal  entries  and  skeleton  ledger  accounts  affecting 
the  two  issues  of  bonds. 

{b)  Balance  sheet,  March  31,  1913. 

Solution  to  Problkm  No.  15 

The  author's  experience  in  making  and  solving  problems 
leads  him  to  observe  that,  while  much  attention  has  been  paid  to 
the  creation  of  sinking  funds,  little  attention  has  been  given  to 
their  disposition.  This  problem  has  therefore  as  its  object,  in 
part,  the  illustration  of  how  a  sinking  fund  fulfills  the  purpose 
for  which  it  is  accumulated. 

The  need  for  a  sinking  fund  arises  in  connection  with  an  issue 
of  bonds.  The  day  of  reckoning  may  not  be  ignored.  In  order 
that  the  funds  necessary  to  meet  the  obligation  at  maturity  may 
be  on  hand  when  needed,  they  are  accumulated,  by  laying  aside 
installments  periodically,  in  what  is  called  a  sinking  fund.  The 
authority  upon  which  it  rests  is  usually  the  sinking  fund  clause 
in  the  mortgage  which  states  that  the  fund  shall  be  "set  aside 
out  of  profits."  This  is  a  somewhat  loose  form  of  expression, 
and  from  an  accounting  point  of  view  frequently  leads  to  dis- 
cussion. 

The  accountant,  with  his  love  of  precision,  finds  himself 
questioning  the  meaning  of  an  expression  such  as  the  above. 
He  is  unable  to  determine  whether  a  reserve  is  first  to  be 
created  out  of  profits  and  subsequently  funded,  or  whether  a 
certain  amount  of  cash  or  its  equivalent  is  to  be  set  aside  only 
if  the  net  profits  are  sufficient,  without  regard  to  the  creation  ol 
the  reserve.  It  is  doubtful  if  the  man  who  drew  the  first  mort- 
gage from  which  the  others  have  been  carelessly  copied  really 
knew  himself  what  he  meant.  A  moment's  reflection  will  show 
the  importance  of  being  clear  on  the  point.  The  fund  may  be 
accumulated  by  merely  setting  aside  the  cash  installment  from 
time  to  time  and  the  company  may  pay  dividends  regularly.  II 
the  provision  for  the  sinking  fund  is  made  out  of  profits,  the 
company  may  pay  no  dividends  until  after  the  bond  issue  is 

123 


Elementary  Accounting  Problems 

retired  To  the  author,  reserving  for  a  sinking  fund  seems 
ultra-conservative,  since  the  reserve  reverts  to  surplus  as  soon 
as  the  fund  is  used  to  pay  off  the  bonds  and  the  company  is  in 
no  better  position  to  pay  a  cash  dividend  than  before.  It  is  true, 
of  course,  that  the  surplus  may  be  distributed  as  a  stock  divi- 
dend, but,  it  would  appear,  to  the  detriment  of  stockholders  dur- 
ing the  period  intervening  between  the  placing  and  retiring  of 
the  bonds  if  the  list  were  a  changing  one.  It  may  also  be  men- 
tioned here  in  passing  that  railroads  and  large  industrials  rarely 
issue  sinking  fund  bonds  any  more,  apparently  on  the  theory 
that  outstanding  bond  issues  will  be  everlastingly  refunded. 

Without  further  discussion  of  the  relative  advantages  and 
disadvantages  of  reserves,  it  may  be  stated  that  the  fund  is  ac- 
cumulated by  setting  aside  periodically  (monthly,  quarterly,  semi- 
annually or  annually)  a  certain  sum.  These  sums  with  their 
interest  accumulate  so  that  at  the  maturity  of  the  bonds  the  fund 
is  sufficient  to  retire  them.  The  sinking  fund  scientifically  cal- 
culated represents  what  is  called  *'the  amount  of  an  annuity." 
The  amount  to  be  set  aside  each  time  is  determined  by  "divid- 
ing one  (i)  by  the  amount  of  an  annuity."  The  easiest  manner 
of  determining  the  proper  amount  is  to  consult  sinking  fund 
tables  such  as  Sprague's.  In  a  word,  the  periodical  installment 
is  that  which  will,  when  set  aside  regularly  at  compound  inter- 
est, amount  to  the  required  sum  at  the  end  of  a  given  period. 

Another  method  of  determining  the  amount  to  be  set  aside  con- 
sists of  dividing  the  amount  of  the  indebtedness  by  the  number 
of  years,  or  divisions  thereof,  which  the  indebtedness  has  to  run. 
The  amount  so  determined  is  that  which  should  be  set  aside  at 
the  end  of  each  period.  The  fund  will  not  only  equal  the  amount 
of  the  bonds  outstanding  at  maturity,  but  there  will  be  an  excess 
representing  the  accumulation  of  interest.  Such  procedure  would 
be  questionable  from  a  standpoint  of  good  finance,  in  that  the 
company  would  have  been  unnecessarily  deprived  of  the  use  of 
certain  funds.  This  objection  is  sometimes  overcome  by  deduct- 
ing from  the  amount  to  be  deposited  at  the  end  of  any  period, 
after  the  first,  an  amount  equal  to  the  interest  earned  on  the  fund 
during  the  period  just  passed.  For  example;  if  the  amount  of 
a  mortgage  bond  outstanding  were  $100,000  and  the  period 
covered  by  the  bond,  ten  years,  the  amount  to  be  deposited  in 
the  sinking  fund  semi-annually  would  be  $5,000.     If  at  the  end 

124 


Problem  Number  Fifteen 

of  the  second  period  the  interest  on  the  $5,000  deposited  at  the 
end  of  the  first  period  were  $100,  the  amount  to  be  deposited  at 
the  end  of  the  second  period  would  be  $4,900.  By  continuing 
with  this  process,  the  amount  which  the  company  would  be 
required  to  provide  would  decrease  gradually  as  the  interest  on 
the  fund  increased. 

The  sinking  fund  may  exist  in  the  form  of  cash  on  deposit 
with  some  interest  paying  institution  or  interest  bearing  secur- 
ities, the  rate  of  interest  on  deposits  ranging  from  two  per  cent, 
which  is  probably  the  most  common,  to  four  per  cent,  which  is 
fairly  high.  The  yield  on  securities  will  range  from  four  and 
one-half  to  five  and  one-half  per  cent.  In  some  instances 
the  company's  own  bonds  aflFord  the  most  profitable  medium  of 
investment.  That  is  to  say,  it  sometimes  becomes  more  profit- 
able to  call  some  of  the  outstanding  bonds  even  at  a  premium 
rather  than  allow  the  funds  to  remain  invested  in  securities  of 
other  companies  or  deposited  in  a  bank.  This  is  usually  pro- 
vided for  in  the  bond  through  a  clause  which  permits  the  com- 
pany to  call  the  bonds  after  a  certain  date  at  a  slight  premium, 
sometimes  however  as  high  as  no.  If  for  example,  a  com- 
pany places  an  issue  of  five  per  cent  bonds  at  par  and  sub- 
sequently the  level  of  yield  on  bonds  in  general  falls  so  that 
it  is  difficult  to  invest  the  sinking  fund  in  bonds  yielding  more 
than  four  per  cent,  it  becomes  profitable,  provided  sufficient 
length  of  time  remains  before  the  maturity  of  the  issue  and  the 
premiums  required  to  obtain  the  bonds  is  not  too  high,  for  the 
company  to  call  and  cancel  its  own  bonds,  thereby  saving  the 
difference  between  four  per  cent  and  premium  on  the  one 
hand  and  five  per  cent  on  the  other.  The  contrast  is  the  more 
striking  and  the  extent  of  the  saving  more  apparent  if  a  de- 
posit at  two  per  cent  is  substituted  for  the  four  per  cent  bond 
investment  used  in  the  above  illustration.  The  effect  of  calling 
bonds  is  disastrous  to  the  sinking  fund  calculations  since  they 
must  be  revised  each  time  bonds  are  called  and  redeemed. 

If  allowed  to  remain  undisturbed  until  the  maturity  of  the 
bonds  the  fund  if  scientifically  calculated  will  amount  exactly 
to  the  par  of  the  bonds  outstanding.  If  it  exists  in  the  form 
of  bonds  of  other  companies  such  securities  will  be  converted 
into  cash.     The  cash,  whether  proceeding  from  this  source  or 

125 


Elementary  Accounting  Problems 

from  gradual  accumulation,  will  be  used  to  purchase  the  bonds 
outstanding,  which  will  then  be  cancelled. 

There  will  doubtless  arise,  in  thinking  about  the  matter  of 
interest  involved  in  sinking  funds,  the  question  of  what  be- 
comes of  the  complement.  When  interest  is  charged  to  sinking 
fund,  what  is  credited?  Usually  one  of  three  accounts,  namely, 
income  from  securities,  reserve  for  sinking  fund,  or  interest  on 
bonds.  Obviously,  if  the  bonds  are  to  be  retired  out  of  profits, 
that  is,  a  reserve  created  and  funded,  the  interest  must  be 
credited  to  the  reserve  in  order  that  it  may  at  all  times  equal  the 
fund.  If  a  reserve  is  not  involved,  the  better  procedure  would 
seem  to  be  to  credit  the  amount  to  interest  on  bonds:  first,  be- 
cause by  virtue  of  this  income  the  expense  for  interest  has 
been  reduced;  and  second,  because  the  funds  corresponding  to 
the  income  are  tied  up  in  the  sinking  fund  and  are  not  available 
for  general  purposes. 

The  journal  entries  required  by  the  problem  follow.  A  work- 
ing sheet,  for  the  sake  of  brevity  in  so  far  as  the  skeleton  ledger 
accounts  are  concerned  and  to  make  the  solution  clear,  has  been 
substituted  for  the  ledger  accounts  as  called  for: 

Sinking  fund  for  redemption  of  first  mtge.  bonds... $    3,157.05 

To   cash    $    3.157.05 

For  deposit  to  sinking  fund  (9/30/12),  be- 
ing final  payment  on  account  of  mortgage 
payable  October  i,  1912. 

First  mortgage  bonds  purchased  213,000.00 

To    sinking    fund    for    redemption   of   first 

mortgage    bonds    210,825,00 

Cash     2,175.00 

For  purchase  of  213  first  mortgage  bonds 
outstanding  September  30,  1912,  at  par. 

Interest  accrued  on  first  mortgage  bonds 9,000.00 

To  cash  6,390.00 

Profit  and  loss  surplus 2,610.00 

Payment  of  interest  accrued  and  due  on  213 
bonds  at  time  of  cancellation ;  excess  inter- 
est on  87  bonds  credited  to  profit  and  loss. 

First  mortgage  bonds  payable 300,000.00 

Profit  and  loss  surplus 2,175.00 

To  first  mortgage  bonds  purchased 302,175.00 

To  record  cancellation  of  300  first  mortgage 
bonds  due  October  i,  1912,  and  charge  to 
surplus  the  premium  on  87  bonds  purchased 
at  i02}/2. 

126 


Problem  Number  Fifteen 

Reserve  for  sinking  fund  210,825.00 

To  profit  and  loss  surplus  210,825.00 

To  close  out  to  surplus  the  reserve  for  sink- 
ing fund,  the  bonds,  for  which  the  sinking 
fund  was  provided,  having  been  purchased 
and  cancelled. 

io/i/i2  Cash  300,000.00 

To  first  mtge.  bonds  payable 300,000.00 

For  issue  of  first  mortgage  5%  gold  bonds 
idated  October  i,  1912,  due  October  i,  1922, 
subject  to  sinking  fund,  the  reserve  for 
which  is  to  be  created  out  of  profits. 

ia/31/12   Sinking  fund    6,136.68 

To   cash    6,136.68 

Profit  and  loss  surplus 6,136.68 

To  reserve  for  sinking  fund 6,136.68 

3/31/13  Sinking  fund  61.36 

To  reserve  for  sinking  fund  61.36 

a/31/13  Sinking  fund * .       6,136.68 

To   cash    6,136.68 

Profit  and  loss  surplus 6,136.68 

To  reserve  for  sinking  fund 6,136.68 

Profit  and  loss  surplus  (interest  on  bonds)  7,500.00 

To  int  ace.  on  first  mtge.  bonds  payable.. . .  7,500.00 


127 


Elementary  Accounting  Problems 


WORKING    SHEET 


Debits 


Land  and  buildings 

Equipment  

H.  W.  and  motor  trucks. 
Furniture  and  fixtures.. 

Investments  

Materials  and  supplies. 

Goods  in  process 

Finished  goods 


Cash 


Accounts  receivable. 
Notes  rec.  and  int. . . 


S/F  for  1st  mtge.  bonds, 

1st  mtge.  bonds  pch'd, . . 
Deferred  charges  to  exp. . 


Credits 

1st  mtge.  bonds 

Taxes  accrued 

Salaries  and  wages  acrd. 

Accounts  payable 

Notes  payable  and  int.. . 
Int.  ace.  on  ist  mtge.  bds. 
Res.     depn.    plant    and 

equip 

Res.  for  sinking  fund. . . , 


Pfd.  C/S  issued  and  out 
standing   

Com.  C/S  issued  and  out- 
standing    


P  &  L — surplus. 


Trial 

Balance 

Sept.30, 1912 


$1,275,946.27 

348,727.43 
12,872.51 
15,269.50 

200,000.00 
65,138.79 
25.591-46 
45,468.71 


68,649.52 


125,279.34 
41,286.39 


207,667.95 

89,175.00 
12,813.97 


$2,533,886.84 


300,000.00 
14,025.00 
18,927.34 
87,316.75 
51,487-63 
9,000.00 

142,305.12 
210,825.00 


1,000,000.00 
500,000.00 
200,000.00 


$2,533,886.84 


Adjustments 


Debits 


$  300,000.00 


5,157.05 

6,136.68 

61.36 

6,136.68 

213,000.00 


300,000.00 


9,000.00 


210,825.00 


6,136.68 
2,175.00 
7,500.00 
6,136.68 


Credits 


6,390.00 
2,175.00 
3,157.05 
6,136.68 
6,136.68 


210,825.00 


302,175.00 


Balance 

Sheet 

Mar.  30,  1913 


$1: 


300.000,00 


7,500.00 


6,136.68 

61.36 

6,136.68 


210,825.00 
2,610.00 


275,946.27 

348,727.43 

12,872.51 

15,269.50 

200,000.00 

65,138.79 
25,591.46 
45,468.71 


344,654.11 


125,279.34 
41,286.39 

12,334.72 


12,813.97 

$  2,525,383.20 


300,000.00 
14,025.00 

18,927.34 

87,316.75 

51,487.63 

7,500.00 

142,305.12 
12,334.72 


1,000,000.00 

500,000.00 
391,486.64 

$2,525,38320 


128 


Problem  Number  Fifteen 

THE  COTTON  SEED  OIIv  COMPANY 
Bai^anc^  Sh^t,  March  31,  1913 


Assets 


Liabilities  and  Capital 

Capital       stock       (out- 
standing) : 

Preferred $1,000,000.00 

Common    500,000.00 

Total  cap.  stock... $1,500,000.00 

I  St    mtge.     5%     bonds 

(1922)     300,000.00 

Current  liabilities: 

Taxes  accrued $     14,025.00 

Salaries    and     wages 

accrued    18,927.34 

Accounts  payable  ...       87,316.75 
Notes  payable  and  in- 
terest          51,487.63 

Int.  ace.  on  bonds....         7,500.00 

Total    current    lia- 
bilities     $   179,256.72 

Reserve    for    depr.    of 
plant  and  equip 142,305.12 

Reserve      for      sinking 
fund    12,334.72 

P  &  L — surplus 391,486.64 

Total  liabilities  and 
capital     $2,525,383.20 


Land  and  bldgs $1,275,946.27 

Equipment     348,727.43 

Horses,      wagons     and 

motor  trucks    12,872.51 

Furniture  and  fixtures.  15,269.50 

Investments    200,000.00 

Working     and    trading 
assets : 
Materials     and     sup- 
plies     $  65,138.79 

Goods  in  process 25,591.46 

Finished  goods   45,468.71 

Total  working  and 

trading  assets... $  136,198.96 

Current  assets: 

Cash    $  344,654.11 

Accounts  rec 125,279.34 

Notes  rec.  and  int...  41,286.39 

Total     current    as- 
sets     $  511,219.84 

Sinking  fund   12,334.72 

Deferred  charges  to  exp.  12,813.97 

Total  assets  $2,525,383.20 


Probi,e:m  No.  15a  (Practice) 

The  following  is  a  trial  balance  of  The  National  Gelatine 
Company,  September  30,  1912,  after  closing: 

Land  and  buildings,  $1,537,876.49;  equipment,  $384,734.72; 
horses,  wagons,  and  truck,  $15,296.25;  furniture  and  fixtures, 
$20,543.62;  investments,  $250,000;  materials  and  supplies,  $56,- 
973.15;  goods  in  process,  $37,195.64;  goods  in  stock  (packed), 
$54,864.17;  cash,  $86,946.25;  accounts  receivable,  $130,972.43; 

129 


Elementary  Accounting  Problems 

notes  receivable  and  interest,  $51,362.93;  sinking  fund  for  re- 
demption of  first  mortgage  bonds,  $416,924.75;  first  mortgage 
bonds  purchased  out  of  sinking  fund  (75  at  an  average  price  of 
I03M)>  $77^812.50;  deferred  charges  to  operations,  $15,318.79; 
first  mortgage  bonds  payable,  $500,000  (dated  October  i,  1892, 
due  October  i,  19 12,  interest  six  per  cent,  payable  April  i  and 
October  i,  last  paid  April  i,  1912)  ;  taxes  accrued,  $15,375; 
salaries  and  wages  accrued,  $16,297.43;  accounts  payable,  $84,- 
371.57;  notes  payable,  $61,728.36;  interest  accrued  on  first  mort- 
gage bonds,  $15,000;  reserve  for  depreciation  of  plant  and  equip- 
ment, $171,861.83;  reserve  for  sinking  fund,  $422,187.50;  pre- 
ferred capital  stock  outstanding,  $1,000,000;  common  capital 
stock  outstanding,  $500,000;  profit  and  loss  surplus,  $350,000. 

The  sinking  fund  has  been  accumulated  by  setting  aside  an 
amount  scientifically  calculated,  and  the  reserve  for  the  sink- 
ing fund  has  been  created  out  of  profits.  The  final  deposit  to 
the  sinking  fund  has  not  been  made,  but  the  reserve  was  in- 
creased as  usual  before  closing  on  September  30.  The  bonds 
due  October  i  were  taken  up  and  cancelled  as  of  that  date. 

The  company  issues  as  of  October  i,  191 2,  a  new  series  of 
500  ten-year  gold  bonds  which  bear  interest  at  five  per  cent, 
have  a  sinking  fund  provision,  and  the  reserve  for  sinking  fund 
as  before.  Sinking  fund  deposits  are  to  be  made  quarterly  in- 
stead of  semi-annually.  The  amount  deposited  December  31, 
1912,  was  $10,227.80.  The  interest  allowed  on  the  deposit  by 
the  sinking  fund  depository  to  March  31,  19 13,  was  $102.27. 
The  amount  deposited  March  31,  191 3,  was  $10,227.80. 

Prepare : 

(a)  Journal  entries  and  skeleton  ledger  accounts  affecting 
the  two  issues  of  bonds. 

(b)  Balance  sheet,  March  31,  191 3. 


130 


PROBLEM  No.  i6 
Demonstration 

The  Investment  Securities  Company  began  business  on  Janu- 
ary I,  19 1 2,  with  a  paid-in  capital  of  $2,000,000,  for  which  stock 
was  issued. 

During  the  year  the  following  transactions  took  place :  Janu- 
ary I,  1912,  purchased  200  shares  of  American  Shoe  Company 
stock  at  102 J^  and  }i;  50M  American  Motor  4's  (interest  pay- 
able semi-annually  on  January  i  and  July  i — ^bond  to  run  6 
years)  at  I02j^  and  }i ;  January  17,  purchased  at  private  sale 
2,000  shares  (entire  capital  stock)  Sunshine  Varnish  Com- 
pany at  103;  July  I,  purchased  50M  Wheeling  and  Lake 
Erie  4's  (to  yield  4.7%,  interest  January  i  and  July  i — 18 
years  to  run)  for  $45,780.25  and  brokerage  }i ',  5, 000  shares 
(entire  capital  stock)  of  the  New  York  City  Properties  Com- 
pany at  an  average  price  of  no  and  % ',  500  shares  (entire  cap- 
ital stock)  of  the  Spot-Light  Lamp  Company  at  an  average 
price  of  75^  and  %.  The  sales  were :  March  31,  loM  American 
Motor  4's  at  105 >^  less  ^  and  accrued  interest  $100;  September 
30,  20M  Wheeling  &  Lake  Erie  4's  at  98  less  }i  and  accrued 
interest  $200. 

American  Shoe  paid  a  stock  dividend  of  4%  on  August  ist; 
Sunshine  Varnish  a  cash  dividend  of  4%  on  September  15th. 
The  New  York  City  Properties  stock  was  deposited  with  a 
trustee  on  October  i,  1912,  as  security  for  an  issue  of  $300,000 
collateral  trust  6%  gold  bonds,  due  October  I,  1922,  interest 
April  1st  and  October  ist,  which  were  sold  at  par.  The  New 
York  City  Properties  stock  paid  a  10%  dividend  on  November 
15,  191 2.  The  yield  on  American  Motor  4*s,  based  on  a  cost 
of  $51,342.44,  is  3>^%.  The  surplus  on  the  Sunshine  Var- 
nish Company's  balance  sheet  at  December  31,  1912,  was  $45,750; 
that  on  the  New  York  City  Properties,  $125,000.  There  was  a 
deficit  of  $10,000  on  the  balance  sheet  of  the  Spot-Light  Lamp 
Company  at  December  31,  1912. 

131 


Elementary  Accounting  Problems 

Provide  for  amortization  or  accumulation  in  the  case  of 
bonds;  revalue  stocks  in  accordance  with  the  respective  balance 
sheets ;  and  prepare : 

(a)  General  balance  sheet,  December  31,  19 12. 
(h)   Statement  of  income  and  profit  and  loss  for  the  year. 
(Brokerage  on  50M-W.  &  L.  E.  4's  is  to  be  regarded 
as  an  expense) 


Solution  to  Probi^em  No.  16 

JOURNAI.  ENTRIES 

1912 

Jan.    I    American  Motor  4's   $        29.94 

To  profit  and  loss  $         29.94 

To  adjust  cost  of  50M  Am.  Motor  4's  pur- 
chased, so  as  to  place  them  on  an  exact 
3J^%  basis. 

Mar.  31    Sales — American  Motor  4's   10,268.49 

To  American  Motor  4's  10,268.49 

To  transfer  cost  of  loM  Am.  Motor  4's, 
representing  1/5  of  50M  at  $51,342.44,  to 
sales  of  same. 

Interest  on  bonds IO.15 

To  sales — American  Motor  4's 10.15 

For -amortization  of  premium  on  loM  Am. 
Motor  4's  sold,  being  the  difference  be- 
tween $100,  the  accrued  interest  at  time  of 
sale  and  Y^  of  31^%  on  $10,26849. 

June 30    Accrued  interest  on  American  Motor  4's...         800.00 

To  interest  on  bonds  718.79 

American  Motor  4's  ,  81.21 

To  accrue  interest  on  40M  Am.  Motor  4's 
for  the  six  months  ended  June  30,  1912, 
and  apportion  same  to  interest  on  bonds 
and  amortization  of  premium  as  follows: 

2%  (H  of  4%  )  on  $40,000.00... $800.00 
iM%  (K  of  3^%)  on  $41,073.95...  718.79 

Amortization    $  81.21 


Problem  Number  Sixteen 


Aug.    I     American  Shoe  stock  800.00 

To  profit  and  loss  surplus  800.OO 

For  4%  stock  dividend. 

Sept.30    Sales— W.  &  Iv.  E.  4's  18,34243 

To  W.  &L.  E.  4's 18,342.43 

To  transfer  cost  of  20M  W.  &  L.  E.  4's, 
representing  2/5  of  50M  at  $45,780.25  plus 
$75-83,  to  sales  of  same. 

Sept.  30    Sales— W.  &  L.  E.  4's  15.52 

To  interest  on  bonds  15.52 

For  accumulation  of  discount  on  20M  W. 
&  L.  E.  4's  sold,  being  the  difference  be- 
tween $200,  the  accrued  interest  at  time 
of  sale  and  %.  of  4.7%  on  $18,342.43. 

Dec.  31     Sunshine  Varnish  stock  39,750.oo 

N.  Y.  Properties  stock 74,375.00 

Spot-light  Lamp  stock  2,062.50 

To  reserve  for  revaluations  of  securi- 
ties      116,187.50 

For  revaluations  of  above  securities  in 
accordance  with  the  values  indicated  by 
their  respective  balance  sheets. 

Accrued  interest  on  Am.  Motor  4's 800.00 

To  interest  on  bonds  717-37 

American  Motor  4's  82.63 

To  accrue  interest  on  40M  Am.  Motor  4's 
for  the  six  months  ended  December  31, 
1912,  and  apportion  same  to  interest  on 
bonds  and  amortization  of  premium  as  fol- 
lows : 

2%  (5^  of  4%  )  on  $40,000.00... $800.00 
lH%  (^  of  3^%)  on  $40,992.74. . .  717.37 

Amortization    $  82.63 

Accrued  interest  on  W.  &  L.  E.  4's 600.00 

Wheeling  &  L.  E.  4's  46.57 

To  interest  on  bonds  646.57 


133 


Elementary  Accounting  Problems 


To  accrue  interest  on  30M  W.  &  L.  E.  4's 
for  the  six  months  ended  June  30,  1912, 
and  apportion  same  to  accrued  interest  and 
accumulation  of  discount  as  follows : 

2.35%  (^  of  4-7%)  on  $27,513.65... $646.57 
2%       (^2  oi  4%    )  on  $30,000.00. . .  600.00 


Accumulation    $  46.57 

Interest  on  bonds  payable 4,500.00 

To  interest  accrued  on  Coll.  Trust  6's..  4,500.00 

Interest  on  $300,000  from  Oct.  i  to  Dec.  31, 
1912,  at  6%. 

Sales — American  Motor  4's 279.16 

Sales — Wheeling  &  L.  E.  4's 1,217.05 

To  profit  and  loss 1,496.21 

To    close    out    sales    accounts    and    show 
profits  on  respective  sales  as  indicated. 


SKELETON   LEDGER  ACCOUNTS 


Cash 


Capital  Stock 


i 


$2,390,212.50) 
American  Shoe  Stock 


$912,242.75 


$2,000,000.00 


Sales — Am.  Motor  4'j 


Stock  div. 


$20,525.00 
800.00 


American  Motor  4's 


SoM $51,312.50 

P.  &  L 29.94 


loM $10,268.49 

Amort 81.21 

Amort 82.63 


loM $10,268.49  loM $10,537.50 

P.  &  L 279.16)  Amort 10.15 

Sales — Wheeling  &  L.  E.  4'j 


$18,342.43  20M $19,575.00 


20M 

Accum 15.52 

P.  &  L 1,217.05 


Sunshine  Varnish  Stock 


Collateral  Trust  6's 


$206,000.00 
Revaluation. . .    39,75o.oo 

Wheeling  &  Lake  Erie  4's 


$300,000.00 
Reserve  for  Revaluation  of  Securities 


50M  ... 
Accum. 


.$45,780.25  20M $18,342.43 

46.57 


$116,187.50 


New  York  City  Properties  Stock 


Interest  on  Bonds  Receivable 


Revaluation 


$550,625.00 
..     74,375.00! 

Spot-Light  Lamp  Stock 


Am.  Mo.  4's.  .$         10.15 


$37,937.So| 
Revaluation  ...    2,062.50 


loM  Am.  Mo.  4*s 

$100.00 

Am.  Mo.  4's 

718.79 

20M  W.&L.E.4's 

200.00 

Do 

15.52 

Am.  Mo.  4's 

717.37 

W.  &  L.  E.  4's. 

646.57 

134 


Problem  Number  Sixteen 

SKELETON   LEDGER  ACCOUNTS    {Continued) 
Accrued  Interest  on  Bonds  Dividends  on  Stocks  Owned 


Am.  Mo.  4's $  800.00 

Am.  Mo.  4's 800.00 

W.  &  L.  E.  4's. .     600.00 


Cash  $  800.00 


Sunshine    $8,000.00 

N.  Y.  C 50,000.00 


Interest  on  Bonds  Payable 


$4,500,001 
Interest  Accrued  on  Coll.  Trust  6's 


$4,500.00 


Profit  and  Loss 


Brokerage $     62.50 


Am.  Mo.  4's $     29.94 

Profit  Am.   Mo. 

4's 279.16 

Profit  W.  &  L. 

E.  4's 1,21705 


Profit  and  Loss  Surplus 


|Am.  Shoe $  800.00 


THE    INVESTMENT    SECURITIES    COMPANY 
Cash  Book 

Date                     Receipts  Amount 

1912 

Jan.     I     Capital  Stock $2,000,000.00 

Mar.  31     loM  Am.  Motor  4's  at  I05J^  less  % io,537-50 

Accrued  interest  on  above 100.00 

July     I     Interest  on  40M  Am.  Motor  4's 800.00 

Sept.  15     Sunshine  dividend,  4%  on  $200,000 8,000.00 

Sept.  30    20M  W.  &  L.  E.  4's  at  98  less  % i9,57S-0O 

Accrued  interest  on  above 200.00 

Oct.     I     Collateral  Trust  6's  sold  at  par 300,000.00 

Nov.  15    N.  Y.  C.  Prop,  dividend,  io%  on  $500,000  50,000.00 

$2,389,212.50 


Date  Disbursements  Amount 

1912 

Jan.      I     200  Am.  Shoe  at  102^  and  ^ $     20,525.00 

50M  Am.  Motor  4's  102^  and  ^ 51,312.50 

Jan.    17    2,000  Sunshine  Varnish  at  103 206,000.00 

July     I     50M    W.   &   L.    E.   4's    ($45,780.25    and 

$62.50)    45,842.75 

5,000  N.  Y.  City  Props,  at  no  and  ^. ..  550,625.00 

500  Spot-light  at  75M  and  Ya 37,93750 

Dec.  31     Balance 1,476,96975 

'  $2,389,212.50 


Elementary  Accounting  Problems 


Trial  Balance — ^December  31,  1912  (before  closing) 


Debits 


Credits 


Cash $1,476,969.75    Capital   stock $2,000,000.00 


Am.  Shoe  stock 

Am.  Motor  4's. 

Sunshine  Varnish  Co.. 
WheeHng  &  L.  E.  4's. . 
N.    Y.    City    Properties 


300,000.00 


21,325.00    Collateral  Trust  6's. .. . 
40,910.11    Reserve     for     revalua- 

245,750.00       tions  of  securities 

27,484.39    Int.    accrued    on    Coll. 

Trust  6's 

stock  625,000.00    Int.  on  bonds  receivable 

Spot-light  Lamp  stock.        40,000.00    Dividends      on     stocks 

Accrued  int.  on  bonds.  1,400.00       owned    58,000.00 

Int.  on  bonds  payable. .         4,500.00    Profit  and  loss 1,463-65 

Profit  and  loss  surplus.  800.00 


116,187.50 

4,500.00 
2,388.10 


$2,483,339.25 


$2>483,339.25 


THE   INVESTMENT   SECURITIES   COMPANY 
General  Balance  Sheet — December  31,  1912 


Assets 


Liabilities  and  Capital 


Securities  owned* $1,000,469.50 

Cash  1,476,969.75 

Accrued      interest      on 
bonds   1,400.00 


Total  assets $2,478,839.25 


Capital   stock $2,000,000.00 

Coll.  Trust  6%  bonds..  300,000.00 

Int.    accrued    on    Coll. 

Trust  6's 4,500.00 

Reserve  for  revalua- 
tions of  securities 116,187.50 

Surplus    58,15175 


Total    liabilities    and 

capital    $2,478,839.25 


THE  INVESTMENT   SECURITIES   COMPANY 

Statement  of  Income  and  Profit  and  Loss  for  the  Year  Ended 
December  31,  19 12 

Gross  income  from  investments : 

Dividends  on  stocks $58,000.00 

Interest  on  bonds  receivable 2,388.10 


Total  income $60,388.10 

Expense : 
Interest  on  bonds  payable 4,500.00 


Net  income  from  investments $55,888.10 


Profit  and  loss  credits : 

Adjustment  of  cost — Am.  Motor  4's $       29.94 

Profits  on  sales  of  securities 1,496,21 


N.   Y^  City   Properties  stock   (par  value  $500,000,   book  value  $625,000)    deposited 
Tri 


to  secure  Collateral  Trust  6'i 


136 


Problem  Number  Sixteen 

Total $57,414.25 

Front  and  loss  charge — brokerage 62,50 

Profit  and  loss — surplus $57,351-75 

Add — stock  dividend — Am.  Shoe  stock 800.00 

Profit  and  loss  surplus — Dec.  31,  19,12 $58,151.75 


Few  comments  are  necessary  on  this  problem  since  most  of 
the  entries  are  self-explanatory.  It  would  perhaps  make  the 
demonstration  clearer  if  all  transactions,  cash  as  well  as  others, 
were  expressed  in  journal  entry  form  chronologically.  This, 
however,  would  either  cause  a  duplication,  if  the  cash  book  were 
also  shown,  or  deprive  the  solution  of  a  very  important  part  of 
its  content.  The  entries  in  the  cash  book  are  given  as  they 
would  appear  in  practice,  and  the  items,  as  there,  give  only  a 
hint  as  to  supplementary  adjustments  which  must  be  made 
through  the  medium  of  the  journal.  Examples  of  this  are  the 
amortization  of  premium  and  accumulation  of  discount  and 
transferring  the  cost  of  sales  to  the  sales  account  when  sales 
of  securities  take  place.  The  latter  practice  is  consistent  and 
clear,  but  I  believe  will  be  the  exception  rather  than  the  rule. 
Too  often  will  the  sale  be  simply  credited  to  the  stock  account. 
The  result  is  a  mixed  account  which  must  be  analyzed  at  closing 
time  since  the  stock  remaining  in  the  account  will  have  been 
affected  by  the  profit  or  loss  on  the  transaction. 

In  the  matter  of  amortization  and  accumulation  a  word  or 
two  may  be  said.  Amortization  is  the  term  used  to  express  the 
gradual  reduction,  through  the  application  of  a  part  of  the  in- 
terest earned,  of  premium  on  bonds.  Accumulation  is  the  term 
used  to  express  the  gradual  increase,  through  the  application  of 
a  part  of  the  interest  earned,  of  a  bond  purchased  below  par. 
In  either  case  the  object  is  to  bring  the  bond  to  par  at  maturity. 
Amortization  is  sometimes  applied  to  discount  as  well  as  pre- 
mium but  erroneously  so.  Such  use  of  the  term  probably  fol- 
lows the  thought  that  it  is  the  discount  which  is  being  reduced. 
While  this  is  of  course  true,  consistency  requires  that  the  bond 
be  looked  upon  as  increasing  in  amount  as  time  passes  until  at 
maturity  it  reaches  par.  The  best  illustration  of  the  necessity 
for  care  in  the  matter  of  amortization  and  accumulation  is  the 
so-called  life-tenant  and  remainderman  case.  If  an  estate  is 
left  so  that  one  person  is  to  receive  the  income  during  life  and 

137 


Elementary  Accounting  Problems 

a  second  the  principal  upon  the  death  of  the  first  person,  then 
the  interest  must  be  carefully  apportioned.  A  bond  purchased 
at  112  will  cost  $1,120.  At  maturity  it  will  be  redeemed  at 
$i,ooo.  If  the  interest  in  full  shall  have  been  paid  to  the  life- 
tenant,  the  estate  will  at  time  of  maturity  of  the  bond  have  been 
depleted  to  the  extent  of  $120.  As  a  matter  of  justice  and 
equity,  part  of  the  interest  must  be  applied  to  the  reduction  of 
the  premium  while  the  balance  may  be  paid  to  the  life-tenant. 
The  interest  received  is  called  the  nominal.  The  interest  paid 
to  the  life-tenant  the  effective. 


Problem  No  i6-fl 


The  Wall  Street  Securities  Company  began  business  on  Janu- 
ary I,  1 91 2,  with  a  paid-in  capital  of  $1,000,000  for  which  stock 
was  issued. 

The  transactions  during  the  ensuing  year  were  as  fol- 
lows :  January  i,  purchased  200  shares  American  Iron  Company 
stock  at  103^  and  }i;  50M  C.  M.  &  St.  P.  6's  (interest  payable 
semi-annually  on  January  i  and  July  i — ^bond  to  run  17^^ 
years)  at  112  and  }i;  January  23,  purchased  at  private  sale 
2,000  shares  (entire  capital  stock)  of  the  Hudson  Brick  Com- 
pany at  105;  July  I,  purchased  50M  Naugatuck  Valley  4's  (to 
yield  4.85%,  interest  January  i  and  July  i — 6  months  to  run) 
for  $49,792.53  and  brokerage  }i;  entire  capital  stock  (5,000 
shares)  Philadelphia  Realties  Company  at  an  average  price  of 
112  and  %;  entire  capital  stock  (500  shares)  Yonkers  Wall 
Paper  Company  at  an  average  price  of  78 J^  and  %.  The  sales 
were:  April  30,  loM  C.  M.  &  St.  P.  6*s  at  114  less  %  and 
accrued  interest  $200;  August  31,  loM  Naugatuck  Valley  4's 
at  98  less  %  and  accrued  interest  $66.67. 

The  American  Iron  Company  paid  a  stock  dividend  of  5% 
on  August  15th.  Hudson  Brick  Company  a  cash  dividend  of 
5%  CD  September  15th.  The  Philadelphia  Realties  Company 
stock  was  deposited  with  a  trustee  on  October  i,  1912,  as  security 
for  an  issue  of  400M  collateral  trust  4^%  gold  bonds,  due 
October  i,  1922,  interest  April  ist  and  October  ist,  which  were 
sold  at  par.    The  Philadelphia  Realties  Company  paid  a  dividend 

138 


Problem  Number  Sixteen 

of  9%  on  November  15,  1912.  The  yield  on  C.  M.  and  St.  P.  6's, 
based  on  a  cost  of  $56,098.65,  is  4.95%.  The  surplus  on 
the  balance  sheet  of  the  Hudson  Brick  Company  at  December 
31,  1912,  was  $50,000;  that  on  the  Philadelphia  Realties  Com- 
pany, $135,257.42.  There  was  a  deficit  of  $12,538.26  on  the 
balance  sheet  of  The  Yonkers  Wall  Paper  Company  at  Decem- 
ber 31,  1912. 

Provide  for  amortization  or  accumulation  in  the  case  of 
bonds;  revalue  stocks  in  accordance  with  the  respective  balance 
sheets;  and  prepare: 

(a)  General  balance  sheet,  December  31,  1912. 

(&)       Statement  of  income  and  profit  and  loss  for  the  year 
ended  December  31,  1912. 

(Brokerage  on  50M   Naugatuck  Valley  4's  is  to  con- 
sidered as  an  expense.) 


139 


Elementary  Accounting  Problems 

PROBLEM  No.  17 
Demonstration 

The  Kent  Wire  Screen  Company  having  acquired  all  of 
the  capital  stock  of  the  Derby  Wire  Netting  Company,  it  is 
proposed  to  merge  the  latter  with  the  former  as  of  July  i,  1912. 

The  trial  balances  June  30,  191 2,  of  the  respective  companies 
after  closing,  are  as  follows ; 

Kent  Wire  Screen  Company 

Land  and  buildings,  $525,750;  equipment,  $85,729.43;  motor 
trucks,  $8,780.25 ;  furniture  and  fixtures,  $6,943.27 ;  Derby  Wire 
Netting  Company,  capital  stock,  par  value  $100,000,  cost  $97,- 
713.50;  materials  and  supplies,  $18,379.51;  goods  in  process, 
$16,591.46;  finished  goods,  $23,468.46;  cash,  $12,640.31 ;  accounts 
receivable,  $54,345.26;  notes  receivable  and  interest,  $10,132.75; 
sinking  fund,  $45,376.59;  deferred  charges  to  expense,  $1,537.82; 
first  mortgage  6%  gold  bonds  payable,  due  1927,  $250,000;  taxes 
accrued,  $5,250;  salaries  and  wages  accrued,  $3,178.29;  accounts 
payable,  $85,216.04;  due  to  Derby  Wire  Netting  Company, 
$536.12;  notes  payable  and  interest,  $41,273.25;  interest  accrued 
on  bonds  payable,  $2,500;  reserve  for  depreciation  of  plant  and 
equipment,  $69,434.91 ;  preferred  capital  stock  outstanding, 
$250,000;  common  capital  stock  outstanding,  $150,000;  profit 
and  loss  surplus,  $50,000. 

Derby  Wire  Netting  Company 

Land  and  buildings,  $240,327.92;  machinery  and  tools, 
$48,934.27 ;  horses,  wagons,  and  harness,  $6,387.35 ;  furniture  and 
fixtures,  $8,500;  capital  stock  of  the  Improved  Screen  Door 
Company,  par  $20,000,  cost  $23,457.86;  patents,  $10,000;  raw 
materials,  $23,721.89;  goods  in  process,  $32,568.34;  finished 
goods,  $18,478.27;  cash,  $14,686.43;  accounts  receivable, 
$57^395-05;  due  from  the  Kent  Wire  Screen  Company,  $536.12; 

140 


Problem  Number  Seventeen 

notes  receivable  and  interest,  $8,037.50;  sinking  fund,  $30,483.14; 
consignment,  $1,000;  deferred  charges  to  operations,  $1,250;  first 
mortgage  5%  gold  bonds  payable,  due  1930,  $100,000;  taxes 
accrued,  $2,ySy;  salaries  and  wages  accrued,  $5,843.62;  accounts 
payable,  $114,527.16;  due  the  Improved  Screen  Door  Company, 
$10,000;  notes  payable  and  interest,  $51,673.53;  interest  accrued 
on  first  mortgage  bonds,  $833.33;  reserve  for  sinking  fund, 
$30,483.14;  reserve  for  depreciation  of  plant  and  equipment, 
$37,329.52;  common  capital  stock  outstanding,  $100,000;  profit 
and  loss  surplus,  $72,286.84. 
From  the  foregoing  submit: 

(a)  The  entries  on  the  books  of  The  Kent  Wire   Screen 
Company  necessary  to  effect  the  merger. 

(b)  The  necessary  entries  on  the  books  of  the  Derby  Wire 
Netting  Company. 

(c)  Balance  sheet  of  The  Kent  Wire  Screen  Company  after 
the  merger. 


S01.UT10N  TO  Problem  No.  17 

A  consolidated  trial  balance  of  the  books  of  the  Kent  Wire 
Screen  Company  and  the  Derby  Wire  Netting  Company  serves 
the  dual  purpose  of  showing  the  situation  with  regard  to  the 
individual  companies  and  the  effect  of  the  consolidation.  It  is 
therefore  presented  before  beginning  a  discussion  of  the  various 
requirements  of  the  problem,  and  is  as  follows: 


Consolidated 
Trial 
Balance 
Debits  June  30, 1912 

Land  and  buildings    $766,077.92 

Machinery,  tools  and  equip- 
ment          134,663.70 

Horses,  wagons,  harness  and 

motor  trucks    15,167.60 

Furniture  and  fixtures   15,443.27 

Derby    Wire    Netting    Co., 

stock,  $100,000  par   ! 

Materials  and  supplies   ....       42,101.40 

Goods  in  process 49,159.80 

Finished  goods    41,946.73 

Cash    27,326.74 

141 


Trial  Balance 

Elimina- 
tions 

June  30, 1912 
Kent            Derby 
Wire        Wire  Net- 
Screen  Co.     ting  Co. 
$525,750.00  $240,327.92 

85,72943 

48,934-27 

8,780.25 
6,94327 

6,387.35 
8,500.00 

97,713.50 

97,71350 
18,379.51 
16,591.46 
23,468.46 
12,640.31 

23,721.89 
32,568.34 
18,478.27 
14,686.43 

Elementary  Accounting  Problems 

Accounts  receivable  111,740.31  54>345-26      57,395-05 

Notes  receivable  and  interest       18,170.25  10,132.75    _  8,037.50 

Sinking  funds    75,859-73  45,376-59      30,483-14 

Deferred  charges  to  expense         2,787.82  l»537-82        1,250.00 
The  Improved  Screen  Door 

Co.,  $20,000  par  23,457-86  23,457.86 

Patents    10,000.00  10,000.00 

Kent  Wire  Screen  Co 536.12                              536-12 

Consignment     1,000.00  1,000.00 

Total  debits  $i,334,903,i3  $98,249.62  $907,388.61  $525,764.14 


Credits 

First  mortgage  6%  bonds, 
due  1927  $  250,000.00  $250,000.00 

Taxes  accrued   8,037.00  5,250.00  $    2,787.00 

Salaries  and  wages  accrued.         9,021.91  3,178.29        5,843-62 

Accounts  payable    199,743.20  85,216.04    114,527.16 

Due  Derby  Wire  Netting  Co.  $     536.12  536.12 

Notes  payable  and  interest.       92,946.78  41,273.25      51,673-53 

Interest  accrued  on  bonds 
payable   Z,ZZZ-3Z  2,500.00  833.33 

Reserve  for  depreciation 
plant  and  equipment   106,764.43  69,434.91      37,329-52 

Preferred  capital  stock  out- 
standing          250,000.00  250,000.00 

Common  capital  stock  out- 
standing          152,286.50      97,713.50    150,000.00    100,000.00 

Profit  and  loss  surplus 122,286.84  50,000.00      72,286.84 

First  mortgage  5%  bonds, 
due  1930  100,000.00  100,000.00 

The  Improved  Screen  Door 
Co 10,000.00  10,000.00 

Reserve  for  sinking  fund..       30,483.14  30,483.14 

Total  credits $i,334,903-i3    $98,249.62  $907,388.61  $525,764.14 


The  object  of  this  problem  is  to  show  the  effect  of  a  merger 
on  the  accounts  of  the  companies  involved.  In  New  York  State, 
"Any  corporation  lawfully  owning  all  of  the  stock  of  any  other 
corporation  organized  for  and  engaged  in  business  similar  or 
incidental  to  that  of  the  possessor  corporation  may  merge  such 
other  corporation  with  it  and  be  possessed  of  all  estate,  property, 
rights,  privileges  and  franchises  of  such  other  corporation."  A 
consolidation  differs  from  a  merger  in  that  "any  two  or  more 
corporations  organized  for  the  purpose  of  carrying  on  any  kind 
of  business  of  the  same  or  similar  nature  which  a  corporation 
organized  under  the  business  corporations  law  might  carry  on, 
may  consolidate  into  a  single  corporation."  The  essential  dif- 
ference between  the  two  is  that  in  the  case  of  merger  all  the 
stock  of  the  subsidiary  or  adjunct  company  must  be  owned  by 

142 


Problem  Number  Seventeen 

the  parent  company,  whereas  in  consolidation  no  cross-ownershil> 
of  stock  is  necessary. 

The  entire  capital  stock  of  the  Derby  Wire  Netting  Company 
was  owned  by  the  Kent  Wire  Screen  Company  and  carried  on 
the  books  as  an  asset.  The  ownership  of  the  capital  stock  made 
the  merger  possible  legally  and  the  merging  of  the  accounts 
followed.  It  was  not  consistent  for  the  Kent  Wire  Screen  Com- 
pany to  take  up  the  assets  and  liabilities  of  the  Derby  Wire  Net- 
ting Company  and  carry  the  stock  of  the  latter  as  an  asset. 

No  more  was  it  consistent  to  consider  accounts  between  com- 
panies as  assets  and  liabilities  of  the  respective  companies. 
Hence  the  necessity  for  eliminating  in  the  consolidated  trial  bal- 
ance the  accounts  between  companies  and  the  capital  stock. 

The  capital  stock  of  the  Derby  Wire  Netting  Company  in 
the  amount  of  $100,000  par  was,  it  will  be  noted,  carried  on  the 
books  of  the  Kent  Wire  Screen  Company  at  cost,  namely, 
$97,713.50.  This  latter  amount  is  therefore  the  amount  at  which 
the  elimination  is  shown  both  on  the  debit  and  credit  sides  of  the 
consolidated  trial  balance.  Since  the  common  capital  stock  of 
the  Derby  Wire  Netting  Company  outstanding  is  $100,000,  and 
the  cost  to  the  Kent  Wire  Screen  Company  was  but  $97,713.50, 
there  appears  in  the  consolidated  trial  balance,  opposite  the  item 
common  capital  stock  outstanding,  the  amount  of  $152,286.50, 
of  which  $2,286.50  is  the  excess  over  $150,000  of  the  common 
capital  stock  of  the  Kent  Wire  Screen  Company.  This  amount 
of  $2,286.50  will  be  recognized  as  the  difference  between  $100,000 
and  $97,713.50.  This  difference  from  the  point  of  view  of  the 
Kent  Wire  Screen  Company  after  the  merger  becomes  in  effect 
surplus,  and  in  setting  up  the  balance  sheet  after  the  merger 
should  be  treated  as  such. 

Previous  to  the  merger,  the  Kent  Wire  Screen  Company 
owed  the  Derby  Wire  Netting  Company  $536.12  on  open  ac- 
count. In  merging  the  two  companies  this  amount  is  treated 
as  an  elimination  since  in  the  very  nature  of  things  a  concern  may 
not  owe  itself  money. 

The  matter  of  offsets  should,  in  case  of  mergers  and  con- 
solidations, receive  careful  attention.  It  often  becomes  neces- 
sary in  practice  to  spend  considerable  time  in  reconciling  ac- 
counts between  or  among  companies  in  order  that  when  the 
accounts  of  the  companies  are  put  together  intercompany  trans- 

143 


Elementary  Accounting  Problems 

actions  may  be  in  agreement.  This  is  especially  true  of  capital 
stock,  bonds,  accounts  receivable,  and  sometimes  interest,  notes  re- 
ceivable and  interest,  advances,  consignments,  and  other  items 
of  a  similar  nature  to  the  ones  mentioned  above. 

From  the  consolidated  trial  balance  there  may  now  be  pre- 
pared the  entries  on  the  books  of  the  Kent  Wire  Screen  Com- 
pany necessary  to  show  the  effect  of  the  merger.  It  is  not  thought 
that  any  additional  light  will  be  thrown  on  the  solution  of  the 
problem  by  setting  forth  the  assets  and  liabilities  in  detail  since 
they  are  shown  very  clearly  in  the  consolidated  trial  balance. 
They  have  therefore,  in  the  entry  which  follows,  been  set  up 
under  the  general  captions  of  sundry  assets  and  of  sundry  lia- 
bilities. 

Sundry  assets   $525,228.02 

Accounts  receivable  (account  of  Kent  W.  S.  Co.)---         536.12 

To  Sundry  liabilities  $353,47730 

Derby  W.   N.   Co.,   outstanding   capital 

stock     100,000.00 

Profit  and  loss  surplus 72,286.84 

To  place  on  the  books  of  the  Kent  Wire 
Screen  Co.  the  assets,  liabilities,  capital  and 
surplus  of  the  Derby  Wire  Netting  Co.  in 
accordance  with  the  terms  of  merger  of  the 
two  companies  as  of  July  i,  1912. 

Accounts  payable  (Derby  W.  N.  Co.)   S36.12 

To  accounts  receivable  (Kent  W.  S.  Co.)...  536.12 

To  offset  accounts  between  companies  after 
merger. 

Derby  W.  N.  Co.,  outstanding  capital  stock 100,000.00 

To  Derby  W.  N.  Co.,  stock  (asset) 97,713-50 

Profit  and  loss  surplus 2,286.50 

To  offset  the  accounts  between  companies 
relating  to  capital  stock  and  take  up  as 
surplus  on  the  books  of  the  Kent  W.  S.  Co., 
the  difference  between  the  par  and  cost  of 
Derby  W.  N.  Co.  capital  stock. 

The  closing  entries  on  the  books  of  the  Derby  Wire  Netting 
Company  are  simple  in  the  extreme.  They  consist  merely  in 
setting  up  an  account  with  the  Kent  Wire  Screen  Company  and 
closing  out  to  this  account  all  other  accounts  on  the  books.  As 
in  the  previous  case,  it  is  not  thought  necessary  to  itemize  the 
assets  and  liabilities.     The  entries  are  as  follows: 

144 


Problem  Number  Seventeen 

The  Kent  Wire  Screen  Co $525,764.14 

To  sundry  assets $525,764.14 

To  close  out  all  assets  to  the  Kent  W.  S. 
Company   in    accordance    with    the    terms    of 
merger  of  July  i,  1912. 

Sundry  liabilities   353477-30 

Capital  stock   100,000.00 

Profit  and  loss  surplus   72,286.84 

To  Kent  W.  S.  Co 525,764.14 

To  close  out  liabilities,  capital  stock  and  sur- 
plus to  the  Kent  W.  S.  Co.  in  accordance 
with  the  terms  of  merger  of  July  i,  1912. 

The  above  entries  complete  the  requirements  of  the  problem 
except  as  to  the  balance  sheet  of  the  Kent  Wire  Screen  Company- 
after  the  merger  which  appears  below. 

THE  KENT  WIRE  SCREEN  COMPANY 

Bai^ance  Sheet— June  30,  1912 

Assets 

Land  and  buildings  $   766,077.92 

Machinery,  tools  and  equipment  134,663.70 

Horses,  wagons,  harness  and  motor  trucks 15,167.60 

Furniture  and  fixtures   15,443.27 

Patents 10,000.00 

Securities  owned 23,457.86 

Working  and  trading  assets: 

Materials  and  supplies  $  42,101.40 

Goods  in  process  49,159.80 

Finished  goods  41,946.73 

Total  working  and  trading  assets 133,207.93 

Current  assets: 

Cash     $  27,326.74 

Accounts  receivable    111,740.31 

Notes  receivable  and  interest 18,170.25 

Total  current  assets 157,237.30 

Sinking   funds    .* ^ 75,85973 

Deferred  charges  to  expense  2,787.82 

Consignments   1,000.00 

Total  assets $1, 334,903  13 


Liabilities  and  Capital 

Capital  stock  outstanding: 

Preferred    $250,000.00 

Common    1 50,000.00 

Total  capital  stock  outstanding -. $   400,000.00 

145 


Elementary  Accounting  Problems 

• 
Bonds  outstanding: 

Kent  Wire  Screen  Co.  6's  due  1927 $250,000.00 

Derby  Wire  Netting  Co.  5's  due  1930 100,000.00 

Total  bonds  outstanding 350,000.00 

Current  liabilities: 

Taxes   accrued    $    8,037.00 

Salaries  and  wages  accrued  9,021.91 

Accounts  payable  209,743.20 

Notes  payable  and  interest  92,946.78 

Int.  accrued  on  bonds  payable  3,333-33 

Total  current  liabilities 323,082.22 

Reserves : 

Depreciation  of  plant  and  equipment $106,764.43 

Sinking    fund    30,483.14 

Total  reserves 137,247.57 

Profit  and  loss  surplus  124,573,34 

Total  liabilities  and  capital $1,334,903.13 


Problem  No.  17-A  (Practice) 

The  following  items  appear  on  the  balance  sheet  of  the 
American  Pin  Company,  June  30,  1912:  Land,  buildings,  equip- 
ment, etc.,  $335,000;  capital  stock  of  the  Bronx  Pin  Ticket 
Company,  par,  $50,000;  cost,  $57,400;  patents,  $15,000;  working 
and  trading  assets,  $37,500;  cash,  $10,000;  accounts  receivable, 
$32,000;  due  from  Bronx  Pin  Ticket  Company,  $375.82;  de- 
ferred assets,  $1,500;  first  mortgage  6%  gold  bonds  payable,  due 
1922,  $100,000;  taxes  accrued,  $3,250;  salaries  and  wages  ac- 
crued, $4,327.82;  accounts  payable,  $123,749.83;  notes  payable 
and  interest,  $80,125;  interest  accrued  on  first  mortgage  bonds 
payable,  $2,500;  reserve  for  depreciation  of  buildings  and  equip- 
ment, $35,000;  preferred  capital  stock  outstanding,  $75,000;  com- 
mon capital  stock  outstanding,  $50,000;  profit  and  loss  surplus, 
$14,823.17. 

The  American  Pin  Company  having  acquired  all  the  capital 
stock  of  the  Bronx  Pin  Ticket  Company,  the  balance  sheet  of 
which  appears  below,  it  is  proposed  to  merge  the  two  companies 
as  of  July  I,  1912. 

The  Bronx  Pin  Ticket  Co. 

Assets — land,  buildings,  and  equipment,  etc.,  $260,000;  capital 
stock  of  the  Blauser  Pin  Tray  Company  carried  at  par,  $35,000; 

146 


Problem  Number  Seventeen 

patents,  *working,  and  trading  assets,  $32,625;  cash,  $10,365.27; 
accounts  receivable,  $37,943.86 ;  sinking  fund,  $3,236.92 ;  deferred 
charges  to  expense,  $1,200.  Liabilities  and  capital — first  mort- 
gage 5%  gold  bonds  payable,  due  1925,  $50,000;  taxes  accrued, 
$2,750;  salaries  and  wages  accrued,  $3,147.83;  due  to  creditors, 
$144,720.30;  due  to  American  Pin  Company,  $375.82;  notes 
payable  and  interest,  $31,372.53;  interest  accrued  on  first  mort- 
gage bonds  payable,  $1,250;  reserve  for  depreciation  of  plant 
and  equipment,  $27,500;  common  capital  stock  outstanding, 
$50,000;  profit  and  loss  surplus,  $69,254.57. 

Prepare : 

(o)  The  entries  on  the  books  of  the  American  Pin  Company. 

{h)  The  entries  on  the  books  of  the  Bronx  Pin  Ticket  Com- 
pany. 

(r)  Balance  sheet  of  the  American  Pin  Company  after  the 
merger. 

*  $10,000. 


147 


Elementary  Accounting  Problems 


PROBLEM  No.  i8 

Demonstration 

The  Central  Furniture  Company  was  incorporated  under  the 
laws  of  the  state  of  New  York  on  July  i,  191 2,  with  an  author- 
ized capital  stock  of  $2,ooo,cxx),  divided  into  10,000  shares  of 
preferred  of  the  par  value  of  $100  each,  and  20,000  shares 
of  common  of  the  par  value  of  $50  each,  for  the  purpose  of 
effecting  a  consolidation  of  three  companies  engaged  in  the 
manufacture  of  furniture  and  furniture  parts.  There  was  also 
authorized  an  issue  of  5%  collateral  trust  bonds,  to  be  dated 
July  I,  1912,  to  the  extent  of  $1,000,000. 

The  consolidation  was  promoted  and  managed  by  the  Syndi- 
cate Trust  Company,  which  prior  to  July  ist  caused  an  investi- 
gation to  be  made  of  the  accounts  of  the  various  companies; 
the  properties  to  be  appraised;  secured  options  upon  the  stock 
and  made  contracts  with  the  holders  thereof.  It  was  stipulated 
in  the  contract  between  the  trust  company  and  the  newly  organ- 
ized furniture  company  that  the  former  should  receive  for  its 
services  10%  of  the  par  value  of  the  preferred  stock  issue,  in 
stock,  and  should  advance  the  cash  necessary  to  pay  the  bonus 
to  the  stockholders  of  the  consolidating  companies,  recovering 
the  advances  out  of  the  proceeds  of  bond  sales  when  same  were 
issued. 

The  balance  sheets  of  the  consolidating  companies  on  May 
31,  1 91 2,  were  as  follows: 

The 

The  Riverton  The  Chat-  Irvington 

Furniture  terton  Chair  Cane  Seat 

Assets                                          Company  Company  Company 

Land  and  buildings $  6^z,7^A2  $432,548.52  $875.41917 

Equipment  « 85,321.88  47,997-22  90,405-74 

Motor  trucks « 8,500.00  5,000.00  7,800.00 

Furniture  and  fixtures 15,132.69  10,547.86  12,532.52 

Securities  owned («> 52,987.50  (6)72,827.25  (0)40,000.00 

Patents,  trade-marks  and  goodwill          25,000.00  25,000.00  45,250.00 

Materials  and  supplies 18,943.26  20,617.32  19,437.62 

Goods  in  process 7,562.89  12,881.23  15,258.45 

Finished  goods   22,713.48  14,683.04  11,138.12 

Cash 30,343.75  23,387.92  27,287.47 

Accounts  receivable   (d)i25,486.29  (6)112,783.48  (/)i02,65i.43 

Notes  receivable   (^)i5,237.8o  11,624.49  12,132.19 

Accrued  interest  on  securities...              125.00  500.00  250.00 

148 


Problem  Number  Eighteen 

Sinking  fund   43,274-13 

Organization  expense 4,750.00  5,125.00           2,525.00 

Moving  expense    1,275.00 

Insurance  unexpired   325-00  273.14              526.19 

Total  assets  $1,099,493-09      $797,071-47  $1,262,613.90 

Liabilities  and  Capital 

First  mortgage  bonds  $   300,000.00 

Debentures    $500,000.00 

Bond  and  mortgage  payable  ....  $250,000.00 

Taxes  accrued   3,275-00  2,500.00  4,38500 

Salaries  and  wages  accrued i,327-5o  847.25  3,127.23 

Accounts  payable   Ci)  103,843.87      0*)97,98i.i4     (*)98,4i7-45 

Notes  payable  and  interest 61,328.43      (^)45,62i.29         76,818.54 

Interest  accrued  on  bonds 6,000.00 

Interest  accrued  on  debentures..  S,ooo.OO 

Interest    accrued    on    bond    and 

mortgage    3,000.00 

Reserve   for   depreciation,  build- 
ings and  equipment   148,718.29        200,000.00        225,237.15 

Preferred  capital  stock— par  $100.         250,000.00  200,000.00 

Common  capital  stock — par  $100.  175,000.00        100,000.00        100,000.00 

Profit  and  loss  surplus  50,000.00         97,121.79         49,628.53 

Total  liabilities  and  capital    $1,099,493.09      $797,071.47   $1,262,613.90 

(a)  Includes  50  shares  of  the  Chatterton  Chair  Company  acquired  at  102 14. 
(&)  Includes  40M  Ann  Arbor,  1st  g.-  4's  at  80.  (c)  Includes  25M  Riverton  Ist 
mortgage  bonds  at  par:  (d)  Includes  $613.95  due  from  the  Chatterton  Chair 
Company,  (e)  Includes  $2,647.92  due  from  the  Irvington  Cane  Seat  Company. 
(/)  Includes  $1,532.17  due  from  the  Riverton  Furniture  Company,  (g)  Includes 
$5,125.75  notes  and  interest  of  the  Chatterton  Chair  Company.  (7i)  Includes 
$1,532.17  due  to  the  Irvington  Cane  Seat  Company.  (;)  Includes  $613.95  due  to 
the  Riverton  Furniture  Company,  (fc)  Includes  $2,647.92  due  to  the  Chatterton 
Chair  Company.  (1)  Includes  $5,125.75  notes  payable  and  interest  In  favor  of 
the  Riverton  Furniture  Company. 

On  July  1st,  the  stock  of  the  Central  Furniture  Company 
was  issued  to  the  Syndicate  Trust  Company  in  blank,  the  latter 
taking  up  the  stocks  of  the  consolidating  companies  in  accordance 
with  the  contracts.  Preferred  stockholders  of  the  Riverton 
Furniture  Company  received  one  share  of  preferred,  two  shares 
of  common  and  25%  in  cash;  common  stockholders,  two  shares 
of  common  and  15%  in  cash.  Stockholders  of  the  Chatterton 
Chair  Company  received  four  shares  of  common  and  40^^  in 
cash.  Preferred  stockholders  of  the  Irvington  Cane  Seat  Com- 
pany received  one  share  of  preferred,  two  shares  of  common  and 
25%  in  cash;  common  stockholders,  three  shares  of  common 
and  10%  in  cash. 

Upon  receipt  of  the  stocks  of  the  subsidiary  companies,  they 
were  deposited  with  a  trustee  and  $500,000  collateral  trust  5% 
bearer  bonds  were  issued  to  the  Syndicate  Trust  Company.  The 
bonds  were  sold  at  an  average  price  of  97.  The  balance  of  the 
preferred  stock  was  sold  at  an  average  price  of  90,  after  which 

149 


Elementary  Accounting  Problems 

the  trust  company  made  its  accounting,  returning  the  balance  of 
common  stock  unsold.     The  trust  company  sold  the  stock  re- 
ceived as  a  commission  at  90. 
Prepare : 
(a)  Consolidated  balance  sheet  of  the  three  companies,  May 

31,  1912. 
{b)  General  balance  sheet  the  Central  Furniture  Company, 
July  31,  1912. 


Solution  to  Problem  No.  18 

The  requirements  of  this  problem  are  that  there  shall  be  a 
consolidated  balance  sheet  of  the  three  companies  at  May  31, 
1912,  and  a  balance  sheet  of  the  Central  Furniture  Company 
after  the  opening  entries  have  been  made.  At  first  glance  these 
might  seem  to  be  the  same  thing.  If  the  situation  is  analyzed 
they  will  be  found  quite  different.  The  consolidated  balance 
sheet  was  presumably  prepared  prior  to  the  actual  organization 
of  the  Central  Furniture  Company  as  a  basis  for  determining 
principally  what  the  capitalization  would  need  to  be.  It  will 
also  have  been  observed  in  reading  the  problem  that  the  Central 
Furniture  Company  was  to  be  a  holding  company,  maintaining 
control  of  the  three  underlying  companies  through  stock  owner- 
ship and  deriving  its  income  from  dividends  on  stocks  and 
interest  on  bonds.  Consequently  the  detailed  assets  and  lia- 
bilities of  the  three  companies  will  not  appear  on  the  books  of 
the  holding  company,  their  place  being  taken  by  the  investments 
in  securities. 

As  a  matter  of  law,  "any  two  or  more  corporations  organ- 
ized for  the  purpose  of  carrying  on  any  kind  of  business  of 
the  same  similar  nature  which  a  corporation  organized  under  the 
business  corporations  law  might  carry  on,  may  consolidate  into 
a  single  corporation."  No  previous  cross-ownership  is  necessary 
here  as  in  the  case  of  a  merger.  It  is  probably  true  that  the 
holders  of  the  stock  of  the  companies  about  to  be  consolidated 
might  pool  their  interests  and  select  representatives  without 
giving  up  or  in  any  way  changing  the  status  of  their  stock. 
It  makes  a  much  cleaner  matter  of  it,  however,  to  organize  a 
new  corporation,  the  capital  stock  of  which  is  used  to  exchange 
for  and  take  up  the  capital  stock  of  the  consolidating  companies. 

The  exchange  of  stock  is  not  always  par   for  par.     The 

150 


Problem  Number  Eighteen 

consolidation  may  have  originated  with  stockholders  of  the  con- 
stituent companies  who  have  seen  an  opportunity  for  mutual 
advancement  and  profit,  or  it  may  have  originated  with  some 
promoter  who  has  seen  an  opportunity  for  himself  in  bringing 
about  the  consolidation.  In  the  first  instance  various  classes  of 
stock  may  give  to  the  respective  holders  varying  degrees  of 
power.  Holders  of  preferred  stock  may  be  loath  to  give  up 
such  stock  unless  they  receive  stock  of  equal  strength  in  the  new 
company.  In  the  second  case  certain  stockholders  will  not, 
perhaps,  give  up  their  old  stock  without  additional  incentive  in 
the  form  of  cash.  Further,  it  may  be  necessary  to  give  a  stock 
or  cash  bonus  in  order  to  equalize  the  settlements  among  stock- 
holders of  the  various  companies  on  account  of  goodwill,  sur- 
plus, franchises  carried  at  a  nominal  figure  or  not  shown,  patents 
and  trade-marks  carried  in  the  same  way,  and  various  other 
attachments  which  a  par  for  par  exchange  would  ignore..  It 
therefore  happens  that  all  sorts  of  plans  are  contrived,  all  having 
as  their  prime  purpose  a  distribution  which  will  be  equitable  and 
satisfactory  to  all  concerned. 

In  the  problem  under  discussion  the  first  requirement  is  a 
consolidated  balance  sheet  of  the  three  companies  May  31,  1912. 
Before  this  can  be  prepared  a  consolidated  trial  balance  or 
working  sheet  is  necessary.  Incident  to  its  preparation,  there 
must  be  taken  into  consideration  the  accounts  between  com- 
panies. What  might  be  a  perfectly  good  asset  as  long  as  someone 
else  owns  a  certain  business  becomes  valueless  if  perchance  you, 
happening  to  be  the  debtor  which  the  asset  represents,  should 
purchase  the  business  in  question.  So  in  the  case  of  a  consolida- 
tion, what  was  formerly  a  debt  owing  by  one  company  to 
another  loses  its  value  when  the  accounts  of  the  two  companies 
are  put  together. 

Examples  of  such  accounts  are,  capital  stock,  bonds,  ac- 
counts receivable  and  payable,  notes  and  interest  receivable  and 
payable,  loans  and  advances,  inter-company  sales,  rent,  etc.  The 
danger  of  duplicating  these  inter-company  transactions  is  avoided 
in  consolidated  working  sheets  or  trial  balances  by  the  introduc- 
tion of  an  elimination  column.  The  operation  of  this  as  well 
as  the  illustration  of  the  above  mentioned  peculiarities  common 
to  consolidation  will  be  seen  from  the  consolidated  trial  balance 
appearing  on  following  page : 

151 


Elementary  Accounting  Problems 


CONSOUDATED  TRIAL  BALANCE  OF  THE  RIVERTON  FURNITURE  COMPANY, 

THE  CHATTERTON  CHAIR  COMPANY  AND  THE  IRVINGTON 

CANE  SEAT  COMPANY 

May  31,  I9I2,  AFTER  CLOSING 

The  The              The 

Riverton  Chatter-       Irvington 

Elirai-        Furniture  ton  Chair      Cane  Seat 

Debits                                   Total               nations        Company  Company      Company 

Land  and  buildings $i,95i»757ii                         $643,789.42  $432,548.52$  875,419.17 

Equipment   223,724.84                                85,321.88  47,997.22         90,405-74 

Motor  trucks   21,300.00                                  8,500.00  5,000.00          7,800.00 

Furniture  and  fixtures 38,213.07                                15,132.69  10,547.86         12,532.52 

Securities  owned  135,689.75  (oc) $30,125.00   (a)52,987.50  (&)72,827.25    (0)40,000.00 

Patents,     trade-marks     and 

goodwill    95,250.00                               25,000.00  25,000.00        45,250.00 

Materials  and  suppHes 58,998.20                                18,94326  20,617.32         19,437.62 

Goods  in  process  35,702.57                                  7,562.89  12,881.23         15,258.45 

Finished  goods  48,53464                               22,713.48  14,683.04        11,138.12 

Cash  81,019.14                               30,343.75  23,387.92        27,287.47 

Accounts  receivable   336,127.16    (d«/)4,794.04  (d)  125,486.29  (e)  112,783.48  (/)  102,65143 

Notes  receivable 33,868.73       ^0)5,125.75    <i^)i5,237.8o  11,624.49         12,132.19 

Accrued  interest  on  securities           875.00                                    125.00  500.00             250.00 

Sinking  fund 43,274-13  43,274-13 

Organization  expense 12,400.00                                  4»750.oo  5,125.00          2,525.00 

Moving  expense 1,275.00  1,275.00 

Insurance  unexpired    1,124.33                                   32500  273.14             526.19 

Total  debits $3,ii9,i33-67        $40,044.79  $i,099,493.09  $797,071-47  $1,262,613.90 

Credits 

First  mortgage  bonds   $  275,000.00  (w)$25,ooo.oo  $  300,000.00 

Debentures     500,000.00  $   500,000.00 

Bond  and  mortgage  payable     250,000.00  250,000.00 

Taxes  accrued   10,160.00                                3,27500  2,500.00          4,38500 

Salaries  and  wages  accrued.         5,301.98                                 1,327.50  847.25          3,127.23 

Accounts  payable 295,448.42  C^/*) 4,794.04  ^^^  103,843.87  (y)97,98i.i4    (fc)98,4i7.45 

Notes  payable  and  interest..      178,642.51        (^)5ii25.75         61,328.43  (^45,621.29         76,818.54 
Interest  accrued  on  bonds..         6,000.00                                6,000.00 
Interest  accrued  on   deben- 
tures           5,000.00  5,000.00 

Interest    accrued    on    bond 

and  mortgage  3,000.00  3,000.00 

Res.  depn.  bldgs.  and  equip..      573,955-44                              148,718.29  200,000.00       225,237.15 

Preferred  capital  stock 450,000.00                              250,000.00  200,000.00 

Common  capital  stock 370,000.00     (»»)5,ooo.oo       175,000.00       100,000.00       100,000.00 

Profit  and  loss  surplus  196,625.32      (»»)    125.00        50,000.00  97,121.79        49,628.53 

Total  credits $3,i  19,133.67        $40,044.79  $1,099,493.09  $797,071.47  $1,262,613.90 


(a)  Includes  50  shares  Chatterton  Chair  Co.  at  102%.  (c)  Includes  25M  Riverton  first  mortgage 
bonds  at  par.  (d)  Includes  $613.95  due  from  the  Chatterton  Chair  Co.  (e)  Includes  $2,647.92  due 
from  the  Irvington  Cane  Seat  Company.  (/)  Includes  $1,532.17  due  from  the  Riverton  Furniture 
Company,  {g)  Includes  $5,125.75  notes  and  interest  of  the  Chatterton  Chair  Company,  (h)  Includes 
$1,532.17  due  to  the  Irvington  Cane  Seat  Company.  (;)  Includes  $613.95  due  to  the  Riverton  Furni- 
ture Company,  (k)  Includes  $2,647.92  due  to  the  Chatterton  Chair  Co.  (I)  Includes  $5,125.75  notes 
payable  and  Interest  in  favor  of  the  Riverton  Furniture  Co.  (m)  50  shares  of  Chatterton  stock  at 
1021^  held  by  the  Riverton  Chair  Co.  (n)  25M  bonds  of  the  Riverton  Chair  Co.  held  by  the  Irvingtos 
Cane  Seat  Co. 


Problem  Number  Eighteen 

The  eliminations  will,  after  reference  to  the  respective  foot- 
notes, presumably  be  clear  with  the  possible  exception  of  the 
adjustment  of  the  surplus  in  the  amount  of  $125.  This  occurs 
by  reason  of  the  fact  that  in  the  securities  owned  by  the  Riverton 
Furniture  Company  there  appear  50  shares  of  the  Chatterton 
Chair  Company  carried  at  102 J4  or  $5,125,  while  the  par  value 
of  the  stock  as  shown  by  the  Chatterton  Chair  Company  is 
$5,000.  While  the  stock  in  question  may  have  cost  the  Riverton 
Furniture  Company  $5,125  and  the  stock  as  evidenced  by  the 
surplus  of  the  Chatterton  Chair  Company  may  be  worth  said 
amount,  it  is  apparent  that  the  premium  increases  the  surplus 
of  the  Riverton  Furniture  Company,  and  that  in  putting  the  two 
companies  together  and  eliminating  the  stock  the  premium  must 
be  offset  against  the  combined  surplus. 

Owing  to  the  fact  that  the  books  of  the  companies  about  to 
be  merged  have  been  closed  before  taking  off  the  trial  balance 
and  consequently  no  nominal  accounts  appear>  to  present  a  coiv 
solidated  balance  sheet  may  smack  of  duplication,  since  the  items 
in  the  balance  sheet  will  be  the  same  as  the  combined  items  in 
the  trial  balance  after  eliminating  the  offsets.  The  consolidated 
balance  sheet  is  presented  nevertheless  in  order  that  the  differ- 
ence between  it  and  the  subsequent  balance  sheet  of  the  Central 
Furniture  Company  may  be  strongly  apparent  The  consolidated 
balance  sheet  is  as  follows: 


153 


Elementary  Accounting  Problems 

THE  RIVERTON  FURNITURE  COMPANY,  THE  CHATTERTON 

CHAIR  COMPANY   AND  THE   IRVINGTON   CANE 

SEAT  COMPANY 

Consolidated  Balance  Sheet,  May  31,  1912 


Assets 


Liabilities  and  Capital 


Land  and  buildings  ...$1,951,757.11 

Equipment     223,724.84 

Motor  trucks  21,300.00 


Furniture  and  fixtures.       38,213.07 


Securities  owned   135,689.75 


Patents,      trade-marks 
and  goodwill    


95,250.00 


Working    and    trading 
assets : 

Materials     and     sup- 
plies     $     58,998.20 

Goods  in  process....        35,702.57 
Finished  goods   48,534.64 


Total  working  and 

trading  assets    ..$  143,235.41 

Current  assets: 

Cash    $  81,019.14 

Accounts  receivable. .  336,127.16 

Notes  receivable 33,868.73 

Acct.  int.  on  securities  875.00 


Total  current  assets. $45 1,890.03 


Sinking  fund  43,274.13 

Deferred  charges  to  ex- 
pense : 

Organization  expense  $  12,400.00 

Moving  expense   ....  1,275.00 

Insurance  unexpired,  1,124.33 


Total  deferred  chgs. 
to  expense $     14,79933 


Total  assets  $3,119,13367 


Capital  stock: 

Preferred    $  450,000.00 

Common    370,000.00 


Total  capital  stock. $   820,000.00 


First  mtge.   bonds . . .      275,000.00 


Bonds  and  mtge.  pay- 
able         250,000.00 


Debentures    500,000.00 


Current  liabilities: 

Taxes  accrued $     10,160.00 

Salary      and      wages 

accrued    5,301.98 

Accounts  payable   . . .      295,448.42 
Notes     payable     and 

interest  178,642.51 

Int.  accrued  on  bonds         6,000.00 
Int.  accrued  on  b/m.         3,000.00 
Int.    accrued    on    de- 
bentures    5,000.00 


Total    current    lia- 
bilities      $   503,552.91 


Reserve     for    deprecia- 
tion : 

Buildings   and   equip- 
ment          573,955-44 


Profit  and  loss  surplus.      196,625.32 


Total  liabilities  and 

capital    $3,119,133.67 


The  consolidated  balance  sheet  affords  the  promoters  a  basis 
for  planning  the  capitalization  of  the  holding  companies  and 
the  consolidated  trial  balance  shows  the  standing  of  the  respec- 

154 


Problem  Number  Eighteen 

tive  companies.  The  latter  serves  as  a  basis  for  settlement  with 
the  stockholders.  While  the  entries  covering  the  exchange  of 
stock  will  appear  in  their  historical  order  among  the  others,  it 
may  be  of  interest  to  glance  at  the  following  tabulation  for  the 
purpose  of  seeing  how  much  stock  and  cash  the  stockholders  of 
the  respective  companies  will  receive  under  the  proposed  plan 
as  well  as  how  much  preferred  and  common  stock  and  cash  will 
be  needed  to  meet  the  combined  requirements : 


Total  1     Kd.       Common  1    Cash 

Riverton 

Preferred  stockholders : 

2500  sh.  X  I  pfd.  ($100  par) 

2500  sh.  X  2  com.  ($50  par)   

....$250,000 
. . . .  250,000 

$250,000 
200,000 

$250,000 
175,000 

200,000 

200,000 
150,000 

$250,000  X  25%    cash    

....     62,500 

$  62^00 

Total  preferred  stockholders... 

$562,500 

Common  stockholders: 

1750  sh.  X  2  com.  ($50  par)   .... 
$175,000  X   15%  cash  

. . .  .$175,000 
. . . .     26,250 

26,250 

Total  common  stockholders  ... 

$201,250 

Chatterton 

Common  stockholders: 
1000  sh.  X  4  com.  ($50  par)   .... 
$100,000  X  40%  cash  

. . .  .$200,000 
. . . .     40,000 

40,000 

Total  common  stockholders   .. 

$240,000 

Irvington 

Preferred  stockholders : 

2000  sh.  X  I  pfd.  ($100  par) 

2000  sh.  X  2  com.  ($50  par)   .... 

$200,000 

....  200,000 

$200,000  X  25%  cash 

. . . .     50,000 

50,000 

Total   preferred   stockholders.. 

....$450,000 

Common  stockholders: 

1000  sh.  X  3  com.  ($50  par) 

$100,000   X    10%  cash 

$150,000 

... . .     10,000 

xo,ooo 

Total   common   stockholders... 

$160,000 

Grand    total    

..$i.6i'?,7=;o 

$450,000 

$975,000 

$188,750 

In  the  journal  entries,  covering  the  opening  of  the  books  of 
the  Central  Furniture  Company  which  follow,  the  explanations 
appear  to  be  sufficient  in  most  cases  to  make  the  entries  clear. 
In  the  case  of  organization  expense,  however,  a  word  or  two 
may  be  necessary.    The  amount  of  $145,000  is  made  up  of  two 

1=; 


DD 


Elementary  Accounting  Problems 

items,  namely  $100,000  as  commission  to  the  trust  company  for 
services  and  $45,000  representing  the  discount  allowed  by  the 
trust  company  on  the  preferred  stock.  To  show  this  latter  item 
on  the  books  as  such  would  appear  to  be  an  admission  on  the 
part  of  the  company,  in  the  circumstances,  that  the  stock  in 
question  was  not  full-paid  when  issued  and  the  corresponding 
legal  liability  would  therefore  attach  to  the  holders  of  the  stock. 
Since  it  is  not  the  intention  to  place  any  such  liability  upon 
stockholders  but  rather  to  increase  the  compensation  to  the  trust 
company  to  allow  for  such  contingencies  the  organization  expense 
representing  commissions  allowed  to  the  trust  company  is  cor- 
respondingly increased. 

Preferred  capital  stock  unissued  ,..$1,000,000 

Common  capital  stock  unissued 1,000,000 

To  preferred  capital  stock  authorized $1,600,000 

Common  capital  stock  authorized l,000,00a 

To  record  the  organization  of  the  Central 
Furniture  Company,  incorporated  under  the 
laws  of  the  state  of  New  York  on  July  i, 
1912,  with  an  authorized  capital  stock  of 
$2,000,000  divided  into  10,000  shares  of  pre- 
ferred of  the  par  value  of  $100  each  and 
20,000  shares  of  common  of  the  par  value  of 
$50  each. 

The  Syndicate-Trust  Company 2,000,000 

To  preferred  capital  stock  unissued i,ooo,ooa 

Common  capital  stock  unissued  1,000,000 

For  capital  stock  issued  in  blank  to  the  Syn- 
dicate-Trust Company. 

Five  per  cent  collateral  trust  bonds  unissued 1,000,000 

To   five  per   cent   collateral   trust  bonds   au- 
thorized   1,000,000 

Provision  for  issue  of  five  per  cent  collateral 
trust  bonds  authorized  as  of  July  i,  1912. 

The   Syndicate-Trust  Company   500,000 

To  five  per  cent  collateral  trust  bonds  unissued  500,000 

For  bonds  issued  to  the  Syndicate-Trust 
Company  for  sale. 

Common  capital  stock  unissued  25,000 

Organization  expense 145,000 

Discount  on  bonds 15,000 

Riverton  Furniture  Co. — pfd.  stock,  2500  sh 562,500 

Riverton  Furniture  Co. — com.  stock  1750  sh 201,250 

Chatterton  Chair  Co.  '^  — com.  stock  1000  sh 240,000 

156 


Problem  Number  Eighteen 

Irvington  Cane  Seat  Co. — pfd.  stock  2000  sh 450,000 

Irvington  Cane  Seat  Co. — com.  stock  1000  sh 160,000 

Cash     701,250 

To  the  Syndicate-Trust  Co 2,500,000 

To  account  for  preferred  and  common  stock 
and  bonds  turned  over  to  the  Syndicate 
Trust  Company. 

THE  CENTRAI,  FURNITURE  COMPANY 

Generai,  Bai^ance  Sheet,  July  31,  1912 


Assets 


Liabilities  and  Capital 


Securittes  owned  $1,613,750 

Cash  701,250 

Organization  expense  ....      145,000 
Discount  on  bonds 15,000 


Capital  stock: 
Preferred — issued      and 

outstanding    $1,000,000 

Common : 

Auth $1,000,000 

Less  unissued      25,000     975,000 


Total  capital  stock. $1,975,000 

Collateral  trust  5%  bonds: 

Auth $1,000,000 

Less  unissued         500,000 


Issued  and  outstanding.      500,000 


Total  assets  ......  .$2,475,000 


Total  liabilities  and 
capital    $2,475,000 


It  will  be  noted  that  in  the  balance  sheet  the  stocks  have  been 
grouped  under  the  title  of  securities  owned  rather  than  shown  in 
detail,  since  a  general  balance  sheet  is  asked  for.  As  a  matter 
of  further  interest,  the  stocks  of  the  underlying  companies  will 
be  seen  to  have  lost  their  identity,  in  so  far  as  the  par  is  con- 
cerned, having  been  taken  up  at  their  cost  in  par  of  the  stock 
and  cash  of  the  parent  company.  The  latter  will  in  the  future 
take  its  earnings  from  subsidiaries  through  dividends. 

Probi,e:m  No.  18-A  (Practice) 


From  the  text  and  demonstration  of  problem  No.  18,  prepare : 

(a)  Journal  entries  relating  to  the  consolidation,  as  they  ap- 
peared on  the  books  of  the  Syndicate  Trust  Company. 

(b)  Skeleton  ledger  accounts  of  the  Syndicate  Trust  Com- 
pany. 

157 


Elementary  Accounting  Problems 

PROBLEM  No.  19 
Demonstration 

The  Ironton  Manufacturing  Company  was  incorporated  July 
I,  1910,  under  the  laws  of  the  state  of  New  York,  with  an  author- 
ized capital  stock  of  $1,000,000,  divided  into  7,000  shares  of 
preferred,  par  value  $100  each,  and  6,000  shares  of  common  stock, 
par  value  $50  each. 

The  incorporators  subscribed  collectively  to  10  shares  of  the 
preferred  stock  and  paid  on  account  thereof  50  per  cent  of  the 
par  value. 

Subsequent  to  incorporation,  a  proposal  was  received  by  the 
company  from  Arthur  Drummond,  on  behalf  of  Franklin  Mans- 
field and  Curtis  Blackwell,  two  of  the  incorporators,  wherein  it 
was  proposed  to  sell  to  the  company  for  the  sum  of  $500,000, 
payable  $400,000  in  preferred  stock  and  $100,000  in  common 
stock,  all  right  and  title  in  the  net  assets,  exclusive  of  cash,  of 
Mansfield  and  Blackwell,  a  copartnership  engaged  in  manufac- 
turing, along  lines  similar  to  those  proposed  by  the  new  company. 
These  assets,  exclusive  of  cash  ($20,000),  were  carried  on  the 
books  of  the  copartnership  at  $400,000 ;  Mansfield  and  Blackwell 
being  equally  interested  in  the  assets,  but  dividing  profits  in  the 
proportion  of  three-fifths  and  two-fifths,  respectively. 

For  the  purpose  of  providing  working  capital,  the  proposal 
of  Drummond  having  been  accepted  and  the  stock  issued  by  the 
company,  Mansfield  and  Blackwell  donate  to  the  company  50© 
shares  of  the  preferred  stock. 

The  assets  and  liabilities  acquired  are  booked  by  the  com- 
pany as  follows:  land  and  buildings,  $225,000;  machinery  and 
tools,  $150,000;  furniture  and  fixtures,  $15,000;  accounts  re- 
ceivable, $125,000;  notes  receivable,  $40,000;  patents,  $25,000; 
mortgage  payable,  $100,000;  accounts  payable,  $20,000;  notes 
payable,  $10,000. 

For  the  purpose  of  refunding  the  mortgage,  the  company 
authorized  an  issue  of  bonds  to  the  extent  of  $125,000  of  which 
a  par  of  $50,000  was  sold  at  95  and  a  further  par  of  $50,000  at 

158 


Problem  Number  Nineteen 

1 10.  The  life  of  the  bonds  was  lO  years,  and  with  the  proceeds 
of  sale  the  mortgage  was  retired. 

A  firm  of  bankers,  Simpson  and  Guthrie,  agreed  to  under- 
write i,ooo  shares  of  the  preferred  stock  at  90,  provided  a  bonus 
of  10  per  cent  in  preferred  stock  was  allotted  to  them,  and  ad- 
vanced on  account  of  the  contract  $50,000  in  cash.  The  bankers 
subsequently  accounted  for  the  sale  of  the  stock,  but  did  not  pay 
over  the  balance  due.  The  preferred  stock  used  for  bonus  pur- 
poses was  taken  from  that  donated.  The  balance  of  the  donated 
stock  was  sold  at  80. 

The  operating  transactions  for  the  six  months  ended  De- 
cember 31,  1910,  were  as  follows:  income  from  sales,  $100,000; 
cost  of  sales,  $60,000  (composed  as  follows:  purchases,  $55,000, 
less  inventory,  December  31,  19 10,  $15,000;  wages  paid,  $14,000; 
manufacturing  overhead,  $5,000  paid,  $1,000  accrued)  ;  selling 
expense,  $6,000  paid,  $2,000  accrued;  administrative  expense, 
$11,000  paid,  $1,000  accrued;  other  income,  $2,000;  deductions 
from  income,  $7,000. 

On  December  31,  1910,  the  balance  of  the  accounts  receivable 
was  $138,000,  and  the  balance  of  the  accounts  payable,  $10,000. 
Spread  the  organization  expense  over  a  period  of  two  years. 
Provide  for  the  premium  on  bonds  sold. 

Prepare : 

The  Ironton  Manufacturing  Company. 

(a)  General  balance  sheet,  December  31,  1910. 

(b)  Statement  of   income  and  profit   and  loss,   six  months 
ended  December  31,  1910. 

Mansfield  and  Blackwell. 

Skeleton  ledger  accounts  showing  copartnership  dissolution. 


S01.TJT10N  TO  ProbIvKm  No.  19 

Scrutiny  of  the  text  of  this  problem  will  reveal  the  fact  that 
it  covers  a  number  of  different  phases.  It  might  almost  be  con- 
sidered a  review  of  the  preceding  problems  on  corporations  with 
the  added  feature  of  building  up  the  cash  and  other  real  accounts 
from  the  complementary  nominal  accounts. 

The  opening  entries  will  not  differ  from  preceding  problems, 
but  attention  should  be  given  to  the  fact  that  the  common  stock 

159 


Elementary  Accounting  Problems 

differs  with  regard  to  par  value  from  the  preferred,  and  this  fact 
should  be  borne  in  mind  on  account  of  its  bearing  on  subsequent 
transactions. 

Preferred  capital  stock  unissued $700,000 

Common  capital  stock  unissued  300,000 

To  preferred  capital  stock  authorized  $700,000 

Common  capital  stock  authorized   300,000 

To  record  the  organization  of  The  Ironton 
Manufacturing  Company,  incorporated  on  July 
I,  1910,  under  the  laws  of  the  state  of  New- 
York,  with  an  authorized  capital  stock  of 
$1,000,000,  divided  into  7,000  shares  of  the  par 
value  of  $100  each  and  6,000  shares  of  the  par 
value  of  $50  each. 

The  subscription  to  ten  shares  of  the  preferred  stock  and  the 
payment  of  cash  on  account  was  presumably  made  by  the  in- 
corporators in  order  to  comply  with  the  letter  of  the  law  and 
avoid  any  appearance  of  not  being  legally  capable  of  carrying  on 
negotiations  looking  to  the  acquisition  of  the  property  of  Mans- 
field &  Blackwell.  The  law  in  New  York  requires  that  the 
amount  of  capital  with  which  a  corporation  may  begin  business 
shall  not  be  less  than  five  hundred  dollars.  It  is  questionable, 
therefore,  if  cash  had  not  been  paid  in  on  account  of  subscribed 
stock,  if  the  corporation  could  legally  have  proceeded  to  acquire 
the  property  in  question. 

Much  discussion  is  had  in  books,  classrooms  and  elsewhere 
as  to  the  terminology  to  be  employed  in  stating  the  entry  covering 
subscriptions  of  this  kind,  but  the  following  seems  to  be  true 
and  accurate  and  as  desirable  as  any : 

Subscribers  to  preferred  capital  stock  $    1,000 

To  subscriptions  to  preferred  capital  stock $    1,000 

For  ten  (10)  shares  of  preferred  capital  stock 
at  $100  each  subscribed  by  the  incorporators. 

Cash   500 

To  subscribers  to  preferred  capital  stock 500 

^  For  50  per  cent  of  $1,000  paid  by  incorporators 

on  account  of  their  subscriptions  to  10  shares 
of  the  preferred  capital  stock. 

The  entries  below  which  follow  closely  the  text  of  the  problem 
call  for  little  comment  since  they  are  either  self-explanatory  or 
are  followed  by  explanations.  Where  such  explanations  are  not 
deemed  sufficient  comments  will  be  inserted. 

160 


Problem  Number  Nineteen 

Plant  and  sundry  assets  $500,000 

To  Arthur  Drummond,  vendor   $500,000 

To  credit  Arthur  Drummond,  vendor,  with  the 
purchase  price  of  the  net  assets  (.exclusive  of 
cash)  of  Mansfield  &  Blackwell  in  accordance 
with  proposal  and  acceptance  of  July  i,  1910, 
whereby  in  consideration  of  $400,000  in  pre- 
ferred stock  and  $100,000  in  common  stock  said 
Arthur  Drummond  is  to  convey  to  The  Ironton 
Manufacturing  Company  all  right,  title  and  in- 
terest in  said  net  assets,  exclusive  of  cash. 

Arthur   Drummond,   vendor    500,000 

To  preferred  capital  stock  unissued  400,000 

Common  capital  stock  unissued   100,000 

For  payment  under  terms  of  contract  as  above 
set  forth. 

Treasury  stock,  preferred   50,000 

To  stock  donation  account   50,000 

For  500  shares  of  preferred  stock  of  The  Iron- 
ton  Manufacturing  Company,  donated  by  Mans- 
field &  Blackwell  for  the  purpose  of  providing 
working  capital. 

With  regard  to  the  next  entry  the  question  may  be  asked  as 
to  how  the  corporation  arrived  at  the  figures  which  are  given 
for  the  assets  and  liabilities.  In  reply  to  this  it  may  be  pointed 
out  that  this  was  a  case  of  "friendly  proceedings."  The  same 
men  who  carried  on  the  business  of  Mansfield  &  Blackwell 
continued  with  the  business  merely  under  a  different  legal 
type  of  organization  as  The  Ironton  Manufacturing  Company. 
There  is  no  reason  to  suppose  that  these  men  would  have  any 
hesitancy  about  supplying  any  information  for  the  books  of 
the  corporation  or  concealing  the  value  at  which  they  placed 
their  goodwill  as  partners.  If  the  reverse  had  been  true  it  is  to 
t)e  presumed  that  the  details  of  notes  and  accounts  would  have 
been  obtained  from  schedules  furnished  by  Mansfield  &  Black- 
well,  the  mortgage  from  the  instrument  itself,  while  the  other 
assets  would  have  been  inventories  and  either  appraised  or 
valued  by  the  purchasing  corporation  or  its  representatives.  While 
the  goodwill  has  been  treated  as  the  difference  between  the  net 
assets  ($450,000)  and  the  par  value  of  the  capital  stock  issued 
($500,000)  there  is  no  reason  why  the  goodwill  might  not  have 
"been  absorbed  in  the  valuation  of  the  assets. 

I^and  and  buildings  , $225,000 

Machinery  and  tools  150,000 

Furniture  and  fixtures  15,000 

161 


Elementary  Accounting  Problems 

Accounts  receivable 125,000 

Notes    receivable    40,000 

Patents    25,000 

Goodwill    50,000 

To  mortgage  payable  $100,000 

Accounts  payable 20,000 

Notes  payable   10,000 

Plant  and  sundry  assets   500,000 

First  mortgage  bonds  unissued   125,000 

To  first  mortgage  bonds  authorized  125,000 

To  provide  for  the  issue  of  $125,000  first  mort- 
gage bonds,  the  proceeds  of  which  are  to  be 
devoted  to  the  extent  of  $100,000  to  refunding 
the  present  outstanding  mortgage. 

Discount  on  bonds  2,500 

Cash     102,500 

To  first  mortgage  bonds  unissued  100,000 

Premium  on  bonds   5,000 

For  sale  of  $100,000  par  of  bonds;  $50,000  at 
95  and  $50,000  at  no. 

Mortgage  payable    100,000 

To  cash  100,000 

For  retirement  of  old  mortgage  out  of  proceeds 
of  bond  issue. 

Simpson  &  Guthrie  100,000 

To  preferred  capital  stock  unissued    100,000 

For  1,000  shares  of  the  preferred  capital  stock 
issued  in  blank  to  Simpson  &  Guthrie,  bankers, 
under  the  terms  of  an  underwriting  agree- 
ment whereby  said  bankers  are  to  account  for 
said  stock  at  90  and  receive  a  bonus  of  10  per 
cent  in  preferred  stock. 

Cash     50,000 

To  Simpson  &  Guthrie   50,00a 

For  cash  advanced  by  bankers  on  account  of 
the  above  underwriting  agreement. 

Organization    expense    10,000 

Stock  donation  account   10,000 

To  Simpson  &  Guthrie   10,000 

Treasury  stock,   preferred    10,000 

For  adjustments  relative  to  the  underwriting 
contract  with  the  bankers  whereby  they  were 
to  receive  10  per  cent  for  thrir  services  and  a 
bonus  of  10  per  cent  in  preferred  stock. 

Cash     32,000 

Stock  donation  account   8,000 

To  treasury  stock,  preferred  40,000 

For  balance  of  treasury  stock  sold  at  80. 

The  following  entries  have  to  do  with  the  operations  of  the 

six  months  ended  December  31,  1910,  from  which,  together  with 

162 


Problem  Number  Nineteen 

the  balances  in  accounts  receivable  and  payable,  the  cash  account 
for  the  six  months  is  built  up 

Accounts   receivable    , $100,000 

To  income  from  sales $100,000 

Purchases     55.000 

To  accounts  payable 55,000 

Inventory    (new)     15,000 

To  purchases 15,000 

Wages .- 14,000 

Manufacturing   overhead    6,000 

Selling   expense 8,000 

Administrative    expense    12,000 

Deductions   from  income    7,000 

To   cash    43,000 

Expenses  accrued 4,000 

Cash     ; 2,000 

To  other  income 2,000 

Accounts  receivable   (new) 138,000 

To  accounts  receivable  (old)    138,000 

Accounts  payable  (old)    10,000 

To  accounts  payable  (new)    10,000 

Cash     .' 87,000 

To  accounts  receivable 87,000 

Accounts    payable    65,000 

To  cash    65,000 

The  last  three  entries  are  those  which  have  to  do  with  ad- 
justments incident  to  the  closing  of  the  books,  namely,  writing 
down  the  organization  expense,  spreading  the  net  premium  on 
bonds  over  the  life  of  the  bonds  and  closing  out  the  stock  dona- 
tion account  to  capital  surplus. 

Profit  and  loss .$    2,500 

To    organization    expense    $    2,Soa 

One-quarter  of  $10,000,  corresponding  to  the 
period  of  six  months  on  a  basis  of  a  two-year 
period  over  which  the  organization  is  to  be 
written  off. 

Premium  on  bonds   125 

To  profit  and  loss  US 

For  one-twentieth  of  $2,500  the  net  premium  on 
bonds  sold  showing  the  proportion  applicable 
to  the  six  months'  period  on  a  basis  of  ten 
years. 

Stock  donation  account  32,000 

To  capital  surplus  32,000 

To  close  out  the  stock  donation  account,  the 
balance  representing  the  amount  realized  Oft 
preferred  capital  stock  donated. 

163 


Elementary  Accounting  Problems 


In  connection  with  the  above  entries  it  i^  possible  that  the 
amount  of  organization  expense  written  off  might  be  appro- 
priately charged  against  capital  surplus  instead  of  profit  and 
loss.  In  fact  objection  could  scarcely  be  found  if  the  entire 
amount  of  the  organization  expense  were  to  be  charged  imme- 
diately to  the  stock  donation  account.  To  follow  either  of  the 
suggestions  would  certainly  be  conservative.  There  appears  to 
be  little  choice  between  charging  capital  surplus  and  charging 
profit  and  loss.  The  latter  method  has  perhaps  a  shade  the  bet- 
ter of  the  argument,  since  there  is  a  well  settled  theory  concerning 
organization  expense  which  considers  it  a  proper  charge  against 
operations  extending  over  a  period  of  time. 

If  the  journal  entries  above  given  are  to  be  posted  to  skeleton 
ledger  accounts  or  set  up  on  a  working  sheet  a  trial  balance  will 
result.  From  such  trial  balance  there  may  be  prepared  the  state- 
ments relative  to  The  Ironton  Manufacturing  Company  required 
by  the  problem  and  which  appear  below : 

THE  IRONTON  MANUFACTURING  COMPANY 
GsNERAi,  Bai^ancs  Sheet — December  31,  1910 


Assets 


Liabilities  and  Capital 


Land  and  buildings $225,cxx) 

Machinery  and  tools  150,000 

Furniture  and  fixtures  ....     15,000 

Patents  and  goodwill 7S,ooo 

Materials  and  supplies,  In- 
ventory       15,000 

Current  assets: 

Cash  $  66,000 

Accounts  receivable 178,500 

Notes   receivable 40,000 

Total  current  assets $284,500 

Organization  expense 7,500 

Total  assets $772,000 


Pfd.   C/S   Auth.... $700,000 
Less  unissued  . . .  200,000  $500,000 


Com.  C/S  Un.    ...  300,000 
Less  unissued  . . .  200,000   100,000 


1st  Mtge.  Bd.  Au..  125,000 
Less  unissued  . . .     25,000   100,000 


Subscription  to  pfd.  capital 

stock 1,000 

Current  liabilities: 

Accounts  payable 10,000 

Notes  payable 10,000 

Expenses  accrued 4,000 


Total  current  liabilities.  $  24,000 


Premium  on  bonds 2,375 


Capital   surplus 32,000 


Profit  and  loss  surplus 12,625 

Total  liab.  and  capital. $772,000 


164 


Problem  Number  Nineteen 

THE  IRONTON  MANUFACTURING  COMPANY 

Statement  of  Income  and  Profit  and  Loss  for  the  Six  Months  Ended 

December  31,  1910 

Income  from  sales  $100,000 

Cost  of  sales   60,000 

Gross  profit  on  sales $  40,000 

Selling  expense   8,000 

Selling  profit    $  32,000 

Administrative   expense    12,000 

Net  profit  on  sales $  20,000 

Other   income    2,000 

Total  income    $  22,000 

Deductions  from  income 7,000 

Net  income — profit  and  loss $  15,000 

Profit  and  loss — credits : 
Premium  on  bonds 125 

Profit  and  loss — gross  surplus $  15,125 

Profit  and  loss — charge: 
Organization  expense — written  off 2,500 

Profit  and  loss — surplus — December  31,  1910   $  12,625 

The  third  requirement  of  the  problem  relative  to  the  accounts 
of  Mansfield  &  Blackwell  is  found  in  the  following  journal  entries 
and  skeleton  ledger  accounts : 

Cash $  20,000 

Miscellaneous    assets    400,000 

To   Mansfield— capital    $2X0,000 

Blackwell— capital    210,000 

Ironton  Manufacturing  Co 500,000 

To  miscellaneous  assets  400,000 

Profit  and  loss 100,00c 

Preferred  stock   400,000 

Common  stock   100,000 

To  Ironton  Manufacturing  Co 500,000 

Profit  and  loss  50,000 

To  preferred  stock   (donated)    50,000 

Profit  and  loss  50,000 

To  Mansfield  &  Blackwell  5O,O00 

Mansfield  capital    240,000 

Blackwell  capital    , 230,000 

To  Mansfield  &  Blackwell— capital  470,000 

Mansfield  &  Blackwell  470,000 

To  preferred   stock    35o,ooo 

Common  stock 100,000 

Cash   20,000 

165 


Elementary  Accounting  Problems 
Misc.  Assets  Mansfield  &  Blackwell,  Capital 


400,000 

400,000 

Mansfield,  Capital 

240,000 

210,000 
30,000 

Cash 

20,000 

20,000 

Preferred  Stock 

400,000                           50,000 
350,000 

Common  Stock 

100,000 


20,000 
100,000 
350,000 

240,000 
230,000 

Blackwell,  Capital 

230,000 

210,000 
20,000 

Ironton  Mfg.  Co. 

500,000                          500,000 

Profit  and  Loss 

50,000 
50,000 


100,000 


100,000 


PROBI.EM  No.  19-A  (Practice) 

The  Sedgwick  Manufacturing  Company  was  incorporated 
under  the  laws  of  the  state  of  New  York,  on  July  i,  1912,  with 
an  authorized  capital  of  $1,000,000,  divided  into  7,500  shares  of 
preferred  and  2,500  shares  of  common,  of  the  par  value  of  $100 
each.  The  incorporators  each  subscribed  to  and  paid  for  20 
shares  of  the  preferred  stock.  Sundry  other  persons  subscribed 
to  50  shares  of  the  preferred  stock  and  paid  25  per  cent  on  ac- 
count thereof. 

At  the  first  meeting  of  the  stockholders,  a  proposal  was  re- 
ceived from  Franklin  Chance,  acting  in  behalf  of  C.  B.  Murray 
and  H.  B.  Forbes,  two  of  the  incorporators,  in  which  the  busi- 
ness of  Murray  &  Forbes,  a  copartnership,  was  offered  to  the 
corporation  for  $500,000,  payable  $400,000  in  preferred  stock 
and  the  balance  in  common  stock;  the  corporation  to  receive  all 
the  goodwill  and  property  of  the  copartnership  except  cash 
$25,000,  and  to  assume  all  the  liabilities.  A  balance  sheet  of 
Murray  &  Forbes,  June  30,  19 12,  showed  Murray's  capital  as 

166 


Problem  Number  Nineteen 

$225,000;   Forbes,  $200,000.     Profits  are  divided  according  to 
capital.    The  proposition  was  accepted  and  the  stock  issued. 

Murray  and  Forbes  donate  400  shares  of  preferred  stock  to 
provide  working  capital,  and  the  assets  and  liabilities  acquired 
are  set  up  on  the  books  of  the  corporation  as  follows :  land  and 
buildings,  $250,000;  machinery  and  tools,  $125,000;  furniture 
and  fixtures,  $17,000;  accounts  receivable,  $123,000;  notes  re- 
ceivable, $45,000;  patents,  $20,000;  bond  and  mortgage  payable, 
$125,000;  accounts  payable,  $30,000;  notes  payable,  $20,000. 

For  the  purpose  of  retiring  the  bond  and  mortgage  payable 
the  company  authorized  an  issue  of  6  per  cent  bonds  in  the 
amount  of  $150,000,  payable  July  i,  1922.  The  bonds  were  sold 
at  an  average  price  of  102}^  and  the  bond  and  mortgage  was 
refunded. 

The  Molten  Trust  Company  agreed  to  underwrite  1,500  shares 
of  the  preferred  stock  at  85  upon  condition  that  they  receive 
in  stock  a  bonus  of  10  per  cent.  The  trust  company  advanced 
$75,000  on  account.  The  bankers  subsequently  accounted  for 
the  sale  of  the  stock  but  did  not  pay  over  the  balance  due.  The 
stock  used  for  bonus  purposes  was  taken  from  that  donated. 
The  balance  of  the  donated  stock  was  sold  at  85. 

The  operating  transactions  during  the  six  months  ended  De- 
cember 31,  1912,  were  as  follows:  income  from  sales,  $95,000; 
cost  of  sales  $50,000  (made  up  of  purchases,  $65,000,  less  inven- 
tory, December  31,  1912,  $35,000;  wages  paid,  $13,000;  wages 
accrued,  $1,000;  manufacturing  overhead  paid,  $6,000);  selling 
expense,  $7,000;  administrative  expense  paid,  $10,000;  adminis- 
trative expense  accrued,  $2,000;  other  income,  $125.62;  deduc- 
tion from  income,  $4,500;  provision  for  bad  debts,  $500.  On 
December  31,  1912,  the  balance  of  accounts  receivable  was  $136,- 
000;  accounts  payable,  $10,000;  no  new  note  transactions  except 
extensions.  Spread  the  discount  on  the  preferred  stock  over  a 
period  of  five  years.    Provide  for  the  premium  on  bonds  sold. 

Prepare : 

(a)   General  balance  sheet,  December  31,  1912. 

(&)   Statement  of   income  and  profit  and  loss   for  the  six 
months  ended  December  31,  19 12. 

(r)  Closing  entries,  books  of  Murray  &  Forbes. 


167 


Elementary  Accounting  Problems 

PROBLEM  No.  20 
Demonstration 

The  following  is  the  balance  sheet  on  February  29,  191 2,  of 
John  Barber,  who  has  filed  a  voluntary  petition  in  bankruptcy: 
land,  $10,000;  buildings,  $25,000;  machinery  and  tools,  $8,500; 
horses,  wagons  and  harness,  $540;  furniture  and  fixtures,  $1,200; 
merchandise,  $8,525;  cash  in  bank,  $237;  cash  in  hand,  $40; 
accounts  receivable,  $5,465;  notes  receivable,  $2,000;  bond  and 
mortgage  payable,  $18,000  (due  July  i,  19 12,  interest  6  per  cent 
last  paid  January  i,  1912)  ;  accounts  payable,  $27,527;  notes 
payable,  $10,000;  capital,  $5,980. 

An  inspection  of  the  books  reveals  the  fact  that  the  balance 
sheet  is  not  complete,  since  the  following  items  have  not  been 
considered:  accrued  interest  on  notes  receivable,  $21.43;  un- 
expired insurance,  $45;  interest  accrued  on  bond  and  mortgage 
payable,  $180;  taxes  accrued,  $65;  interest  accrued  on  notes 
payable,  $100. 

After  the  appomtment  of  the  receiver  the  following  facts 
were  established:  land  has  increased  in  value  and  is  worth 
$12,000;  buildings  have  not  been  depreciated  and  are  appraised 
at  $20,000;  machinery  and  tools  will  bring,  approximately,  $5,000; 
horses,  wagons  and  harness,  $200;  an  offer  of  $500  has  been 
received  for  the  furniture  and  fixtures ;  merchandise  to  the  extent 
of  $500  is  covered  by  the  chattel  mortgage  of  a  creditor  whose 
claim  is  $350;  another  creditor  whose  claim  is  $800  is  less  for- 
tunate, holding  a  chattel  mortgage  of  only  $625;  the  cash  in 
hand  contains  a  $10  I.  O.  U.  of  an  employee,  which  memorandum 
is  worthless;  accounts  receivable  are  classified  as  good,  $3,575, 
doubtful,  $325,  balance  worthless;  the  notes  receivable  are  con- 
sidered good.  The  personal  estate  of  John  Barber  consists  of 
a  house  and  lot,  $5,000,  subject  to  a  mortgage  of  $2,000;  money 
lent  to  a  friend,  $200,  which  is  good ;  household  debts,  $257. 

From  the  foregoing  prepare : 

(a)  Statement  of  affairs. 

(b)  Deficiency  account. 

168 


Problem  Number  Tzventy 

SoivUTlON  TO  PrOBI^EM  No  20 

Statement  of  affairs  and  deficiency  accounts  seem  to  cause 
more  unrest  and  trouble  in  the  student  world  than  any  other 
class  of  statements.  A  problem  bearing  on  insolvency  or  bank- 
ruptcy and  calling  for  these  statements  seems  to  be  the  signal 
for  a  state  of  collapse  which  is  more  or  less  general.  It  is  not 
uncommon  to  find  instructors  attaching  an  amount  of  importance 
to  the  subject  which  appears  somewhat  uncalled  for. 

If  a  student  or  anyone  interested  in  the  subject  could  be  made 
to  see  that  a  statement  of  affairs  is  in  effect  an  estimated  balance 
sheet  it  might  throw  a  different  light  on  the  subject.  The  occa- 
sion for  such  a  statement  arises  when  it  becomes  desirable 
to  ascertain  what  the  condition  of  the  proprietor  and  his  relation 
to  creditors  would  be  were  the  business  to  be  wound  up.  It 
matters  not  whether  the  proprietor  appear  as  a  sole  proprietor, 
copartners  or  a  corporation,  except  in  one  or  two  cases  which 
will  be  mentioned  later.  If  the  reader  is  able  to  imagine  the 
sole  proprietor  of  a  business  receiving  from  his  bookkeeper  a 
balance  sheet  showing  assets  comprising  land,  buildings  and 
furniture,  $25,500;  merchandise,  $10,000;  cash,  $5,000;  accounts 
receivable,  $8,000,  and  liabiHties  in  favor  of  purchase  creditors, 
$33j500>  the  proprietorship  will  be  seen  to  amount  to  $15,000. 
Such  an  amount  the  business  is  said  to  be  worth.  If,  however, 
the  proprietor  were  to  consider  winding  up  or  liquidating  the 
business  (not  selling  it  as  a  going  concern)  a  somewhat  dif- 
ferent condition  might  present  itself.  The  land,  buildings  and 
furniture  at  forced  sale  might  not  bring  more  than  $15,000; 
merchandise,  $7,000.  Accounts  receivable  might  contain  a  num- 
ber of  debts  which  were  worthless  and  others  which  could  not 
be  realized  upon  if  speedy  collection  were  attempted,  so  that 
only  $5,000  would  be  realized.  Thus,  if  the  hypothetical  pro- 
prietor were  to  add  these  estimates  and  the  cash  together  he  would 
find  that  he  could  reasonably  depend  only  upon  $32,000  with 
which  to  pay  creditors,  $33,500.  The  result,  if  his  estimates  were 
correct,  would  be  that  instead  of  having  a  capital  of  $15,000,  he 
would  be  owing  $1,500  more  than  he  had  assets,  or  he  would  have 
a  "deficit"  of  $1,500.  If  he  were  to  start  with  the  balance  sheet 
taken  from  the  books  and  compare  the  items  one  by  one  with 
the  estimates,  the  result  would  be  as  below  and  he  would  have 
the  foundation  of  a  statement  of  affairs. 

169 


Elementary  Accounting  Problems 


Assets 

Esti- 
mated 
Per         to 
book    realize 

Liabilities 

Esti- 
mated 
Per     liqui- 
book    dation 

Land,  bldgs.  and  fur- 
niture     

Merchandise   

Cash    

Accounts  receivable. 

.$25,500  $15,000 
.   10,000     7,000 
.     5,000     5,000 
.     8,000     5,000 

Accounts  payable  . 

Proprietorship 
(surplus)   

..$33,500  $33,500 
..   15,000 

Deficit 

$48,500 

$32,000 
1,500 

$48,500 

- 

$33,500 

$33,500 

If  an  attempt  is  made  to  ascertain  the  cause  of  the  deficit, 
a  comparison  of  the  amounts  estimated  to  be  realized  will  show 
an  estimated  loss  of  $10,500  on  land  and  buildings,  $3,000  on 
merchandise  and  $3,000  on  accounts  receivable,  or  a  total  of 
$16,500.  Against  this  estimated  loss  there  is  the  proprietor's 
capital  of  $15,000  to  be  offset,  revealing  again  the  fact  that  his 
capital  has  been  wiped  out  and  that  his  assets  are  insufficient  to 
the  extent  of  $1,500  to  meet  his  creditors.  These  figures  may 
be  moulded  into  a  deficiency  account  as  follows: 


Debits 


Credits 


Estimated  losses   on   realiza- 
tion : 
Land,  bldgs.  and  furniture. $10,500 

Merchandise    3,000 

Accounts  receivable  3,000 


Proprietorship    $15,000 


Deficit 1 .500 


$16,500 


$16,500 


A  statement  of  affairs  is  typical  of  insolvency  although  it  is 
conceivable  that  it  might  be  prepared  out  of  curiosity  when 
insolvency  was  not  suspected.  It  is  analogous  in  the  case  of 
insolvency  to  the  balance  sheet  in  solvency  in  that  it  shows 
financial  condition,  which,  however,  is  estimated.  Like  the  bal- 
ance sheet  it  is  prepared  by  or  in  behalf  of  the  proprietor.    Since 

170 


Problem  Number  Twenty 

an  important  feature  of  the  statement  is  to  show  the  relation 
to  creditors,  especially  those  whose  claims  are  unsecured  the 
impression  sometimes  gains  recognition  that  the  statement  is 
made  up  from  the  point  of  view  of  creditors.  This,  together 
with  the  fact  there  is  usually  an  excess  of  liabilities  over  assets, 
has  led  to  a  transposition  of  the  two  sides  as  they  appear  in 
the  balance  sheet.  The  argument  in  favor  of  the  transposition 
when  based  on  the  assumption  that  it  is  a  creditor's  statement 
should  be  ignored  for  the  reason  that  it  is  no  more  a  creditor's 
statement  than  is  a  balance  sheet.  The  argument  relative  to 
the  excess  of  liabilities  over  assets  has  some  foundation,  but 
the  objection  to  it,  as  will  be  seen  later  on,  is  that  with  the 
numerous  contras  which  have  to  be  deducted  it  is  very  confus- 
ing to  transpose  the  sides  without  anything  in  particular  being 
gained. 

In  the  same  way  that  the  statement  of  affairs  is  analogous 
to  the  balance  sheet  the  deficiency  account  is  analogous  to 
the  profit  and  loss  account.  The  profit  and  loss  account  explains 
the  fluctuation  in  proprietorship.  The  deficiency  account  serves 
in  a  similar  way  to  connect  the  proprietorship  as  shown  by  the 
balance  sheet  with  the  deficit  as  shown  by  the  statement  of 
affairs. 

It  should  be  borne  in  mind  that  both  statement  of  affairs 
and  deficiency  account  are  statements  which  are  prepared  apart 
from  the  books  and  that  the  books  are  not  adjusted  to  agree 
with  them.  Realization  and  Hquidation  which  follows  insolvency 
rarely  coincides  with  the  estimate  and  therefore  to  adjust  the 
books  in  accordance  with  the  estimate  would  result  in  hopeless 
confusion. 

There  are  perhaps  one  or  two  general  remarks  concerning 
these  statements  which  should  be  made  before  proceeding  to  the 
solution  of  the  present  problem,  namely,  that  any  assets  or 
liabilities  of  the  business  which  do  not  appear  on  the  books 
should  be  treated  as  if  such  were  the  case  and  accordingly  added 
to  the  items  in  the  balance  sheet.  There  should  also  be  included, 
in  the  case  of  a  sole  proprietor,  his  personal  estate  since  busi- 
ness and  personal  creditors  rank  equally  in  the  distribution  of 
the  combined  business  and  personal  estate. 

A  working  sheet  will  be  found  valuable  in  this  type  of 
problem.     It  differs  from  those  used  in  previous  problems  but 

171 


Elementary  Accounting  Problems 

is  fully  as  useful.  It  may  be  criticized  on  the  ground  that  it 
consumes  considerable  time;  but  the  accuracy  which  results 
and  the  facility  with  which  the  statements  may  be  prepared 
seem  to  justify  the  means.  By  applying  the  principles  embodied 
in  the  simple  case  illustrated  above  it  will  be  seen  that  the 
increases  and  decreases  resulting  from  the  application  of  the 
estimated  realization  and  liquidation  to  the  balance  sheet  or  book 
figures  will,  when  applied  to  the  propietorship,  produce  the  deficit. 
Thus  the  figures  will  all  be  tied  up  before  starting  on  the  state- 
ments and  the  attention  may  be  devoted  the  more  important 
matter  of  arrangement. 

.WORKING  SHEET  FOR  STATEMENT  OF  AFFAIRS  AND 
DEFICIENCY  ACCOUNT 

Estimated  real- 
Per      ization  and 
Assets  books    liquidation  Increase    Decrease 

Land     $10,000.00  $12,000.00  $  2,000.00 

Buildings     25,000.00    20,000.00  $  5,000.00 

Machinery  and  tools  8,500.00      5,000.00  3,500.00 

Horses,  wagons  and  harness  ....        540.00         200.00  340.00 

Furniture  and   fixtures    1,200.00         500.00  700.00 

Merchandise     8,525.00      8,525.00 

Cash  in  bank  237.00         227.00  10.00 

Cash  in  hand  40.00  40.00 

Accounts  receivable  5,465.00      3,575.00  1,890.00 

Notes    receivable    2,000.00      2,000.00 

Accrued  interest  on  notes  rec 21.43  21.43 

Unexpired   insurance    45.00  45.00 

Personal   estate : 

House  and  lot 5,000.00      5,000.00 

Loan  receivable 200.00        200.00 

Total  assets   $66,773.43  $57,33343 

Liabilities 

Bond  and  mortgage  payable $18,000.00  $18,000.00 

Accounts    payable    27,527.00  27,527.00 

Notes  payable    10,000.00  10,000.00 

Interest  accrued  on  B/M 180.00  180.00 

Taxes  accrued  65.00  65.00 

Int.  accrued  on  notes  payable 100.00  100.00 

Personal  debts: 

Mortgage  on  house  and  lot 2,000.00  2,000.00 

Household  debts 257.00  257.00 

Total  liabilities   $58,129.00  $58,129.00 

Capital  as  adjusted   $  8,644.43  $     795.57  $  2,000.00  $11440.00 

From  the  above  the  statement  of  affairs  and  deficiency  ac- 
count may  be  prepared.     The  statement  of  affairs  is  arranged 

172 


Problem  Number  Twenty 

with  the  assets  and  deficit  above  liabilities  in  order  to  show  one 
of  the  variations  in  form.  A  statement  showing  the  assets  and 
liabilities  in  account  form  will  be  presented  in  connection  with 
a  subsequent  problem. 

JOHN   BARBER 

Statement  of  Affairs — as  of  February  29,  1912 

Estimated 
realization 
Book  and 

Assets  and  Deficit  Value      liquidation 

Cash  $     277.00    $     267.00 

Merchandise $  8,525.00 

Less — mtges. — per  contra $350.00 

625.00         97500    7,550.00        7,550.00 


Accounts  receivable : 

Good 3.575.00        3,575.00 

Doubtful  32500 

Bad    1,56500 

Notes  receivable  and  interest 2,021.43        2,021.43 

Loans  receivable 200.00           200.00 

Furniture  and  fixtures 1,200.00           500.00 

Horses,  wagons  and  harness 540.00           200.00 

Machinery  and  tools 8,500.00 

Land  and  buildings $35,000.00 

Less — mtge.  and  interest — per  contra 18,180.00  16,820.00      13,820.00 


House  and  lot $  5,000.00 

Less — mtge. — per  contra 2,000.00    3,000.00        3,000.00 


Unexpired   insurance 4500  45-oo 


Total  assets $45,618.43  $36,178.43 

Less — preferred  claims — taxes  (per  contra) 65.00 

Net  assets — subject  to  expenses  of  receivership  avail- 
able   for    unsecured    creditors — representing    97.84 

plus  per  cent  of  their  claims $36,113.43 

Deficit    795.57 


Total  assets  and  deficit $36,909.00 

Liabilities 
Preferred  claims  (deducted  per  contra)  : 

Taxes  $       65.00 

Creditors : 

Fully  secured  (deducted  per  contra)  : 

Bond,  mortgage  and  interest — land  and  buildings  18,180.00 

Bonds  and  mortgage — house  and  lot 2,000.00 

Chattel    mortgage 350.0O 

Partly  secured  (deducted  per  contra)  : 

Chattel   mortgage 625.00 

Unsecured $36,909.00 


Liabilities  (unsecured  creditors) $36,909.00 

173 


Elementary  Accounting  Problems 

JOHN    BARBER 

Deficiency  Account 


Debits 


Credits 


Non-ledger  liabilities : 
Interest    ace,    on    B/M 

payable $  180.00 

Taxes   accrued 65.00 

Int.  acc.  on  N/P 100.00 

Personal  liabilities : 

Mtge.  on  house  and  lot  2,000.00 

Household  debts 257.00 

Balance 8,644.43 


Capital  per  ledger $  5,980.00 

Add: 

Non-ledger  assets: 

Acc.  int.  on  N/R 21.43 

Unexpired   insurance.         45.00 

Personal  assets : 

House  and  lot 5,000.00 

Loans  receivable 200.00 


$11,246.43 

Estimated  losses  on  real- 
ization : 

Buildings    $  5,000.00 

Machinery  and  tools...  3,500.00 

Horses,  wagons  and  har.  340.00 

Furniture  and  fixtures. .  700.00 

Cash  10.00 

Aces,  receivable 1,890.00 


$11,246.43 


Bal.  cap.  as  adjusted. ...  .$  8,644.43 

Estimated  gain  on  realiza- 
tion: 
Land 2,000.00 


Deficit — per    statement    of 
affairs    


795.57 


$11,440.00 


$11,440.00 


Theoretically  the  assets  and  liabilities  should  be  arranged  in 
the  statement  of  aflfairs  in  the  order  that  they  will  be  realized  and 
liquidated.  This  is  practicable  with  regard  to  the  liabilities,  but 
scarcely  possible  if  strict  accuracy  is  to  be  required  with  the 
assets.  No  one  can  tell  whether  furniture  and  fixtures  will  be 
sold  ahead  of  merchandise  or  what  will  happen.  The  order  is 
at  best  an  estimate  based  on  the  probabilities  as  determined  by 
the  experience  of  ordinary  business  routine. 

Criticism  is  sometimes  raised  in  connection  with  the  employ- 
ment of  the  terms  "book  value,"  since  it  is  argued  that  the 
statement  contains  items  which  are  not  on  the  books.  While 
this  may  be  true,  so  far  as  problems  are  concerned,  the  items 
probably  should  be  put  on  the  books  before  a  final  trial  balance 
is  taken. 


Problem  No.  20- A  (Practice) 

The  following  is  the  balance  sheet  on  March  31,   1912,  of 
William  Pearce,  who  has  filed  a  voluntary  petition  in  bankruptcy : 

174 


Problem  Number  Twenty 

land,  $I5,CXX);  buildings,  $40,cxx);  machinery  and  tools,  $9,000; 
horses,  wagons  and  harness,  $600;  furniture  and  fixtures,  $1,500; 
merchandise,  $9,375;  cash  in  bank,  $126;  cash  in  hand  (includ- 
ing worthless  memorandum  of  $8),  $30;  accounts  receivable, 
$8,792;  notes  receivable,  $1,500;  bond  and  mortgage  payable, 
$35,000;  accounts  payable,  $26,998;  notes  payable,  $15,000;  cap- 
ital, $8,925. 

Items  not  on  the  books  are :  interest  accrued  on  notes  payable, 
$150;  unexpired  insurance,  $37,50;  interest  accrued  on  bond  and 
mortgage  payable,  $350;  accrued  interest  on  notes  receivable, 
$32.45;  taxes  accrued,  $87.50. 

The  personal  estate  consisted  of  securities  of  the  market  value 
of  $8,787.50  (cost,  $10,000),  which  were  deposited  as  collateral 
to  secure  a  personal  loan  of  $5,000  and  personal  living  expenses 
amounting  to  $375. 

The  land  and  buildings  were  appraised  at  $47,000  (of  which 
$18,500  pertained  to  the  land);  machinery  and  tools,  $7,500; 
horses,  wagons  and  harness,  $250;  furniture  and  fixtures,  $300; 
there  are  two  chattel  mortgages  on  the  merchandise,  one  of 
$1,236  in  favor  of  a  creditor  whose  claim  is  $975,  and  another 
of  $975  in  favor  of  a  creditor  whose  claim  is  $1,263;  the  cash 
in  hand  contains  postage  stamps,  $2.40;  of  the  accounts  receiv- 
able $4,525.72  are  good,  $1,262.34  are  doubtful,  but  will  probably 
realize  20  per  cent,  and  the  balance  are  considered  worthless; 
the  notes  receivable  are  worthless. 

From  the  foregoing  prepare: 

(a)  Statement  of  affairs. 

(&)  Deficiency  account. 


175 


Elementary  Accounting  Problems 


PROBLEM  No.  21 
Demonstration 

The  following  is  a  balance  sheet  of  The  Columbia  Traction 
Company,  April  4,  1912,  prepared  for  receivers  appointed  on  said 
date: 


Assets 


Liabilities  and  Capital 


Cost  of  road  $2,500,000 

Cost  of  equipment 750,000 

Franchise    2,000,000 

Construction  material 70,000 

Construction  work 25,000 

Cash  37,500 

Due  from  other  lines 5,000 

Notes    receivable — allied 

companies  40,000 

Accrued  interest  on  notes 

receivable    250 

Organization  expense 100,000 

Injuries  and  damages  dur- 
ing construction  50,000 

Total    $5,577,750 


Preferred  capital  stock. .  .$2,000,000 

Common  capital  stock  . . .  1,000,000 
First  mortgage  6%  bonds 

and  interest  2,031,250 

Taxes  accrued 15,000 

Wages  accrued  14,500 

Salaries  accrued 10,000 

Accounts  payable  20,664 

Due  connecting  lines — 

allied    257,860 

Notes  payable  200,000 

Int.  accrued  on  notes  pay- 
able    3,150 

Surplus   25,326 

Total    $5,577,750 


Estimates  made  by  appraisers  and  investigations  made  by 
accountants  reveal  the  fact  that  the  assets  are  grossly  overstated. 
The  actual  cost  of  the  road  was  $1,525,750;  equipment,  $560,000. 
The  road  is  now  worth,  after  allowing  for  depreciation, 
$1,200,000;  the  equipment,  $300,000.  The  franchise,  based  on 
the  excess  earning  power,  is  valued  at  $2,200,000.  The  construc- 
tion material  is  worth  the  book  figure.  The  construction  work 
contains  about  $3,000  of  night  work  paid  for  at  double-time 
rates.  The  accounts  and  notes  receivable  are  good.  Organiza- 
tion expense  and  injuries  and  damages  will  of  course  be  worth 
nothing  in  liquidation. 

In  view  of  the  fact  that  the  franchise  was  a  valuable  one  and 
liquidation  would  prove  so  disastrous  to  the  stockholders,  the 
receiver  was  authorized  to  continue  the  operations  and  to  issue 
$500,000  of  receiver's  certificates  bearing  interest  at  5  per  cent. 

176 


Problem  Number  Twenty-One 

These  were  issued  as  of  May  ist  and  sold  at  an  average  price 
of  923^.  The  proceeds  were  expended  for  new  equipment  to 
the  extent  of  $400,000,  while  $50,500  was  used  to  pay  off  notes 
payable  and  interest. 

During  the  period  from  April  i  to  June  30,  1912,  the  operating 
income  was  $536,732.15;  the  operating  expense,  $302,517.64. 
Of  the  operating  income,  $125,417.82  was  from  other  lines,  on 
account  of  which  and  previous  charges  the  companies  paid 
$126,286.25.  Of  the  operating  expense,  $145,843.29  was  through 
credits  to  connecting  lines,  to  which  $175,328.15  was  paid.  The 
taxes  accrued  at  June  30th  were  $30,000;  wages  accrued,  $5,650; 
salaries  accrued,  $8,000;  salaries  paid,  $27,500.  The  other  ex- 
penses paid  in  cash  were  $12,375.  The  organization  expense  and 
receiver's  discount  are  to  be  written  oflf  one-twentieth.  The 
construction  work  was  completed  by  credits  to  material  of  $7,525 
and  wages  of  $12,436.23. 

On  July  I,  191 2,  the  company  was  authorized  to  increase  its 
capital  stock  to  $5,000,000  preferred  and  $5,000,000  common, 
and  to  issue  $5,000,000  of  5  per  cent  bonds.  The  proposition 
made  to  the  bond  and  stockholders  was  as  follows:  holders  of 
receiver's  certificates  to  exchange  for  5  per  cent  bonds;  bond- 
holders to  exchange  for  5  per  cent  bonds  and  receive  a  bonus 
of  three  shares  of  common  for  each  bond;  preferred  stock- 
holders to  pay  an  assessment  of  $10  per  share;  common  stock- 
holders to  pay  an  assessment  of  $22.50  per  share.  All  assented 
and  exchanged  except  holders  of  120  shares  of  the  common. 

Prepare  the  balance  sheet  of  the  company  after  the  reorganiza- 
tion, injuries  and  damages  during  construction  having  been 
capitalized. 


Solution  to  Problem  No.  21   (Demonstration) 

In  reading  the  problem,  the  second  paragraph,  which  deals 
with  the  estimates  made  by  the  appraisers,  etc.,  may  not  be 
passed  over  without  attention,  since  it  has  a  decided  bearing  on 
the  demonstration  problem.  The  information  is  also  essential 
to  the  solution  of  the  practice  problem  which  calls  for  a  state- 
ment of  affairs  and  deficiency  account. 

177 


Elementary  Accounting  Problems 

In  the  case  of  the  company  which  forms  the  subject-matter 
of  the  problem  a  statement  of  affairs  was  prepared  in  order  to 
furnish  information  to  the  court  on  which  to  decide  whether  the 
best  interests  of  creditors  would  be  served  by  allowing  the  receiver 
to  continue  the  business  or  liquidate  it.  The  decision  being  in 
favor  of  continuation  the  receiver  was  authorized  to  issue  certifi- 
cates for  the  purpose  of  raising  funds  with  which  to  rehabilitate 
the  equipment  and  afford  relief  to  the  more  pressing  creditors. 

It  is  to  be  presumed  that  the  court  would  direct  the  receiver 
to  adjust  the  property  accounts  so  as  to  squeeze  all  the  water 
out,  as  it  were.  If  the  cost  of  the  road  was  actually  $1,525,750, 
instead  of  $2,500,000,  as  shown  on  the  books,  then  obviously 
the  book  figure  should  be  reduced.  Correspondingly,  if  $1,525,750 
represents  the  original  cost  and  after  making  reasonable  allow- 
ance for  depreciation  the  replacement  cost  is  but  $1,200,000,  a 
further  reduction  to  this  latter  figure  should  be  made. 

There  will  here,  as  always,  be  a  certain  amount  of  discussion 
as  to  the  propriety  of  writing  up  the  franchise  to  put  it  on  the 
basis  of  its  earning  power.  The  question  may  well  be  asked, 
"iTow  can  there  be  any  excess  earning  power  with  the  company 
in  a  condition  which  warrants  the  appointment  of  a  receiver?" 
Obviously  the  figure  is  an  estimated  one,  based  on  probable 
income  from  operation  and  decreased  operating  expenses  under 
conservative  and  efficient  management.  If  the  estimate  has  been 
carefully  and  scientifically  made  no  objection  could  be  found  to 
writing  up  the  franchise.  If  the  estimate  is  the  result  of  a  hap- 
hazard guess  or  the  offhand  opinion  of  someone  not  qualified 
or  it  was  the  desire  of  the  receiver,  as  it  undoubtedly  would  be, 
to  be  conservative,  the  franchise  would  probably  not  be  written 
up.  In  fact  it  would  not  startle  anyone  especially  if  the  receiver 
were  to  refuse  to  recognize  the  franchise  as  an  asset  since 
conservatism  is  predominant  among  the  rules  which  guide  him. 
To  illustrate  this,  the  receivers  for  a  concern  in  a  recent  case 
refused,  in  having  the  statement  of  affairs  made  up,  to  recognize 
any  liabilities  except  those  which  had  been  incurred  since  their 
appointment.  This  presumably  on  the  theory  that  other  liabili- 
ties were  not  operative  against  the  receivers  until  proof  of  claim 
had  been  filed. 

No  importance  attaches  to  the  statement  that  the  construction 
work  contains  night  work  paid  for  at  double  time.    It  is  a  mat- 

178 


Problem  Number  Twenty-One 

ter  of  interest,  however,  in  this  connection  to  note  that  the  high 
cost  of  street  railway  construction  work  in  New  York  City  as 
compared  with  other  cities  is  due  to  the  fact  that  it  was  done 
almost  entirely  at  night  when  the  traffic  is  lighter. 

The  first  step  in  the  solution  of  the  problem  consists  in  setting 
up  a  working  sheet,  taking  as  a  basis  the  balance  sheet.  Since 
inserting  and  completing  the  working  sheet  at  this  point  would 
tend  to  detract  from  the  demonstration  its  presentation  will  be 
deferred  until  after  the  journal  entries  have  been  given. 

The  first  journal  entry  would  consist  in  writing  down 
the  cost  of  road  and  equipment.  Following  this  would  come 
the  entries  setting  up  the  receiver's  certificates,  the  applica- 
tion of  the  proceeds  of  same,  the  operating  transactions  and  the 
entries  bearing  on  the  refunding.  If  such  journal  entries  are 
applied  to  the  working  sheet  there  will  result  the  figures  for  a 
statement  of  income  and  profit  and  loss  and  a  balance  sheet 
reorganization,  the  latter  only  being  required  by  the  problem. 

Surplus $    1,750,000.00 

To  Cost  of  road   $    1,300,000.00 

Cost  of  equipment  450,000.00 

To  write  down  the  cost  of  road  and 
equipment  accounts  to  the  appraised 
value  of  the  respective  assets. 

Cash 487,500.00 

Discount  on   receiver's  certificates    12,500.00 

To  Receiver's  certificates 500,000.00 

For  $500,000  receiver's  certificates 
bearing  interest  at  5%  issued  May  i, 
1912,  and  sold  at  975/^. 

Cost  of  equipment  400,000.00 

Notes  payable   50,000.00 

Interest  accrued  on  notes  payable 500.00 

To  Cash    450,500.00 

Disposition  in  part  of  funds  realized 
through  the  sale  of  receiver's  certifi- 
cates. 

Cash   411,314.33 

Due  from  other  lines  125,417.82 

To  Operating  income  536,732.15 

Cash   126,286.25 

To  Due  from  other  lines 126,286.25 

179 


Elementary  Accounting  Problems 

Operating  expense 302,517.64 

To  Due  connecting  lines  

Cash 

Due  connecting  lines 175,328.15 

To  Cash 

Taxes    15,000.00 

To  Taxes  accrued  

Wages  accrued  (old)   14,500.00 

To  Wages  accrued   (new)    

Cash 

Salaries  accrued  (old)   10,000.00 

Salaries   25,500.00 

To  Salaries  accrued  (new)  

Cash   

Administrative  expenses  12,375.00 

To  Cash 

Org.  Exp.  and  rec.  disc,  written  off 5,625.00 

To  Organization  expense 

Discount  on  receiver's  certificates 

Construction  work    19,961.23 

To  Construction  material  

Cash  (wages)   

Cost  of  road  44,961.23 

To   Construction   work    

Interest 4,166.66 

To  Interest  accrued  on  receiver's  cer- 
tificates     

Interest  on  $500,000  for  two  months 
at  5%. 

Interest    28,750.00 

To    Interest   accrued   on   first   mtge. 
6%  bonds   

Interest  on  $2,000,000,  for  six  months 
at  6%  ($60,000)  less  interest  accrued 
on  same  to  April  4  ($31,250). 

Preferred  capital  stock  unissued 3,000,000.00 

Common  capital  stock  unissued 4,000,000.00 

First  mortgage  5%  bonds  unissued  5,000,000.00 

To  Preferred  capital  stock  authorized 
Common  capital  stock  authorized 
First    mortgage    5%    bonds    au- 
thorized     

Increases  in  stock  and  bond  issues 
authorized  for  refunding  purposes. 

180 


145,843-29 
156,674.35 


175,328.15 
15,000.00 


5.650.00 
8,850.00 


8,000.00 
27,500.00 

12,375.00 


5,000.00 
625.00 


7,525.00 
12,436.23 


44,961.23 
4,166.66 

38,750.00 


3,000,000.00 
4,000,000.00 

5,000,000  joo 


Problem  Number  Twenty-One 

Since  there  are  numerous  theories  concerning  the  handling 
of  the  refunding  entries  they  had  better,  perhaps,  be  deferred 
until  after  they  have  been  discussed.  The  following  tabulation 
will  show  at  a  glance  the  whole  situation : 


Received 

Issued 

Securities 

Cash 

5%  bonds 

Pfd.  stock 

Com.  stk. 

Receiver's  certificates. 

First  mtge.  6's 

Preferred  stock 

Com.  stock,  $1,000,000 
12,000 

$    500,000 
2,000,000 

$200,000 
222,300 

$   500,000 
2,000,000 

$600,000 

$2,500,000 

$422,300 

$2,500,000 

$600,000 

.  From  the  above  it  appears  that  the  securities  issued  are  as 
follows : 

5%  bonds $2,500,000 

Common  stock 600,000    $3,100,000 

While  there  has  been  received: 

Receiver's  certificates $   500,000 

First  mortgage  6's 2,000,000 

Cash  422,300      2,922,300 

Showing    an    excess    of    securities    based    over 
securities  and  cash  received  of $177,700 

The  disposition  of  this  amount  then  becomes  the  question 
of  interest.  Five  ways  suggest  themselves,  namely,  charge  either 
cost  of  road;  franchise;  reorganization  expense;  treasury  bonds 
and  stock  (distributing  the  amount  appropriately  over  the  various 
securities  to  which  it  pertains  and  carrying  it  along  with  the 
bonds  and  stocks  as  treasury  securities);  or,  surplus  (deficit). 
To  charge  cost  of  road  or  franchise  would  be  decidedly  out  of 
the  question  under  the  circumstances.  The  expense  is  one  inci- 
dent to  raising  capital  and  has  not  enhanced  in  any  way  the  value 
of  the  property.  To  charge  the  surplus  amount,  which  at  this 
point  would  be  showing  a  deficit,  would  clear  the  matter  out  of 
the  way  and  allow  the  company  to  start  afresh  with  a  full  knowl- 
edge of  a  deficit,  the  size  of  which  would  be  appalling.  On  the 
other  hand,  the  expense  may  be  looked  upon  as  attaching  to  the 
acquisition  of  the  old  bonds  and  the  stock  and  should  therefore 
increase  the  cost  of  such  securities.     To  do  this  would  be  to 

181 


Elementary  Accounting  Problems 

defer  the  day  of  reckoning  since  when  the  stocks  were  sold,  if 
they  ever  were,  the  company  would  be  obliged  to  show  a  heavy 
loss  on  them.  Obviously,  the  only  thing  remaining  to  do  is  to 
charge  reorganization  expense  and  write  the  account  down  over  a 
period  of  years.  Either  this  or  charging  it  to  surplus  immediately 
seems  to  be  the  most  desirable  of  the  five  ways  offered  with 
preference  for  the  former.  In  this  way  the  expense  is  spread 
over  a  period  of  years  and  since  the  benefits  of  refunding,  if 
experience  proves  the  scheme  to  have  been  a  judicious  one,  will 
accrue  over  period  of  years,  justice  will  be  more  or  less  consist- 
ently meted  out  to  a  changing  list  of  stockholders.  Not  for- 
getting, of  course,  that  no  dividends  will  be  paid  until  the  deficit 
resulting  from  the  revaluation  of  the  assets  has  been  obliterated. 
The  entry,  therefore,  in  accordance  with  this  line  of  reasoning 
is  as  follows: 

Receiver's  certificates $   500,000 

First  mortgage  6%  bonds 2,000^000 

Common  stock 12000 

Cash  •••.... 422,300 

Reorganization  expense 177,700 

To  First  mortgage  5%  bonds  unissued '          $2,500,000 

Common  capital  stock  unissued 600,000 

Non-assenting  common  stock 12)000 

There  is  nothing  in  particular  gained  in  this  case  by  setting 
up  the  non-assenting  common  stock  further  than  to  brand  as  it 
were  the  minority  stockholders  who  have  refused  to  become  a 
party  to  the  reorganization.  Sometimes  the  procedure  with  re- 
gard to  reorganization  is  different,  an  entirely  new  company 
being  organized  and  the  securities  of  the  old  company  exchanged 
for  those  of  the  new.  In  such  a  case  certain  stockholders  who 
refuse  to  exchange  may  not  be  ignored  and  their  stock  is  carried 
on  the  books  of  the  new  company  as  non-assenting  stock.  The 
position  of  a  stockholder  who  does  not  care  to  send  good  money 
after  bad  is  a  peculiar  one.  Nothing  can  compel  him  to  exchange, 
neither  will  anything  permit  the  company  to  ignore  him.  He  is 
therefore  carried  along  by  the  company  with  such  stigma  as 
"non-assenting  stock"  implies. 

In  bringing  about  the  exchange  of  receiver's  certificates  and 
bonds  it  is  probable  that  the  interest  would  have  been  adjusted 
up  to  July  I.    The  following  entry  is,  therefore,  in  order. 

182 


Problem  Number  Twenty-One 

Interest  accrued  on  receiver's  certificates   $4,166.66 

Interest  accrued  on  first  mortgage  6's 60,000.00 

To    cash    $64,166.66 

At  this  point  the  working  sheet  may  be  prepared.  It  is  shown 
in  its  entirety  *  even  though  the  problem  does  not  require  an 
income  statement,  in  order  that  the  figures  may  be  tied  up. 
Unfortunately  nothing  is  said  in  the  problem  about  the  interest 
on  notes  receivable  and  payable  so  that  it  cannot  be  accrued  at 
this  time. 

From  the  working  sheet  a  balance  sheet  may  be  prepared.f 
It  has  been  dated  July  31,  1912,  in  order  to  leave  no  question 
as  to  its  having  been  prepared  after  the  reorganization,  since  no 
date  is  given  in  the  problem.  Since  this  is  an  arbitrary  date 
no  cognizance  has  been  taken  of  accruals  for  the  month  of 
July. 

PROBI.EM  No.  2 1 -A  (Practicai.) 

From  the  text  of  Problem  No.  21  prepare  a  statement  of 
affairs  and  deficiency  account  after  the  receiver  had  taken  charge 
and  secured  appraisals  and  estimates. 


*  See  pages  242  and  243. 
t  See  page  186. 

183 


Elementary  Accounting  Problems 


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Problem  Number  Twenty-Two 

PROBLEM  No.  22 
Demonstration 


A  trial  balance  of  the  books  of  Chauncey,  Bennett  and 
Cooper,  a  limited  copartnership,  on  June  3,  1912,  the  date  on 
which  A.  M.  Dawson,  was  appointed  receiver,  was  as  follows : 

Debits  Credits 

Equipment    $  80,972.50     Wages  accrued  $  12,862.15 

Building  material 18,43573      Salaries  accrued 1,243.74 

Invested  in  contracts....  125,942.36      Due  supply  houses 198,891.30 

Cash  5,875.80      Notes  payable  85,000.00 

Due  from  customers 117,226.15  Int.  accrued  on  notes  pay- 
Due  from  sub-contractors      1,520.37         able 126.79 

Notes  receivable 25,000.00  Reserve  depreciation 

Accrued  interest  on  notes                            equipment  35,348.27 

receivable   136.27  Capital : 

Rent  paid  in  advance 1,000.00         J.  D.  Chauncey 23,256.64 

Cost  of  contracts 187,536.24         P.  H.  Bennett 22,177.25 

Salaries — office    20,946.32  J.  W.  Cooper  (special)  25,000.00 

Expenses — office     8,314.69  Income  from  contracts..  190,236.42 

Interest   1,236.13 

Total  $594,142.56  Total  $594,142.56 


The  estimates  of  values  made  by  the  receiver  are  as  follows: 
equipment  if  sold  at  forced  sale  will  bring  $15,000;  building  ma- 
terial, $15,275;  notes  receivable,  $25,000,  and  interest;  due  from 
subcontractors,  $1,200.  The  account  "due  from  customers"  con- 
tains $50,000,  drawn  out  by  Chauncey  and  Bennett.  Liens 
against  work  in  progress  amount  to  $3,000.  Estimated  cost  of 
completing  contracts  which  will  yield  $150,000  h  $9,057.64. 
(Labor,  $7,259;  special  material,  to  be  purchased,  $1,798.64.) 

After  consideration  it  was  decided  to  allow  the  receiver  to 
continue  the  business.  Certain  of  the  creditors  combined  in 
advancing  $10,000  and  extending  credit  necessary  to  enable  the 
receiver  to  purchase  additional  materials.  Chauncey  and  Ben- 
nett, under  pressure,  succeeded  in  raising  $30,000,  which  they 
paid  in.  The  receiver's  transactions  were :  cash  paid  to  creditors, 
$113,452.17;  to  workmen,  $25,875.32;  salaries,  $3,500;  charges  to 

187 


Elementary  Accounting  Problems 

cost  of  contracts,  for  material,  $12,781.43;  for  labor,  $15,653.74. 
Charges  for  salaries,  $3,468.  33;  office  expenses,  $1,239.73;  con- 
tracts completed,  charged  at  $i75,ocx),  cost  $149,343.27;  interest 
accrued  on  notes  payable,  $135.75;  purchases  of  material  on  ac- 
count, $8,793.25;  collected  from  customers,  $187,525.15;  paid 
notes  and  interest,  $20,127.35 ;  expenses  of  receivership,  $2,590.75. 

On  January  i,  1913,  the  receiver  restored  the  business  to  the 
partners,  after  collecting  i  per  cent  on  disbursements  as  his  com- 
mission. J.  S.  Cooper,  the  special  partner,  receives  one-fourth, 
of  the  profits  and  losses. 

Prepare  a  statement  of  affairs  and  deficiency  account. 


Solution  to  Probi^em  No.  22 

While  this  problem  contains  the  necessary  information  for 
both  the  demonstration  and  practice  problems  only  so  much  as 
concerns  the  former  will  be  considered  here.  For  this  purpose 
the  problem  need  only  be  read  to  the  end  of  the  paragraph  fol- 
lowing the  trial  balance  excepting  of  course  the  last  line  which 
calls  for  a  statement  of  affairs  and  a  deficiency  account. 

The  problem  differs  somewhat  from  the  previous  one  of  this 
type  in  that  a  trial  balance  rather  than  a  balance  sheet  is  given. 
The  trial  balance  includes  certain  nominal  accounts  which  should 
be  either  closed  out  or  ignored  in  estimating  the  realization  and 
liquidation.  In  the  latter  event,  however,  the  deficiency  account 
will  show  the  profit  or  loss  on  operations.  As  a  practical  matter 
the  nominal  accounts  would  always  be  closed  out  on  the  books 
and  the  balance  sheet  resulting  would  become  the  basis  for  the 
statement  of  affairs.  In  solving  problems  of  this  type  where 
the  nominal  accounts  appear,  the  technique  is  somewhat  simpli- 
fied by  allowing  them  to  stand.  It  is,  of  course,  true  that  the 
deficiency  account  may  be  begun  with  the  adjusted  capital,  ignor- 
ing the  profit  or  loss  on  operations,  but  as  this  detracts  some- 
what from  the  comprehensiveness  or,  perhaps,  rather  the  inclu- 
sion of  the  operating  results  of  the  period  prior  to  receivership 
adds  to  the  comprehensiveness  it  is  thought  such  results  may  well 
be  included.    To  bring  out  this  point  the  following  may  serve : 

188 


Problem  Number  Twenty-Two 

Capital  per  tri^l  balance $70,433.89 

Income  from  contracts   $190,236.42 

Cost  of   contracts    $187,536.24 

Salaries — office    20,946.32 

Expe*^ses— office     8,314.69 

Interest    1,236.13    218,033.38 

Loss  on  operations   27,796.96 

Capital,  June  3,  1912,  after  closing  $42,636.93 

If  the  nominal  accounts  were  to  be  closed  out  the  deficiency 
account  would  begin  with  the  amount  $42,636.93  and  the  loss 
from  operation  would  be  ignored.  If  they  are  not  closed  out  the 
deficiency  account  will  begin  with  $70,433.89,  and  the  loss  shown 
in  the  account  either  broad  (debits  and  credits)  or  net,  as  choice 
may  dictate. 

The  question  of  the  capital  adjustment  raises  an  interesting 
question  concerning  the  account  of  the  special  partner.  Accord- 
ing to  the  terms  of  the  copartnership  contract,  J.  W.  Cooper, 
the  special  partner,  is  to  receive  one-fourth  of  the  profits,  or  be 
charged  with  one-fourth  of  the  losses.  In  accordance  with  such 
agreement  he  would  be  charged  with  one-fourth  of  $27,796.96 
or  $6,949.24.  The  law  concerning  limited  or  special  copartner- 
ship jequires  that  the  capital  of  special  partners  must  be  main- 
tained at  least  in  the  amount  contributed  and  while  they  may 
receive  interest  and  profit  on  their  investments  such  payments 
may  not  impair  their  capital.  The  question  concerning  the  J. 
W.  Cooper  account  is  the  effect  of  the  loss  above  mentioned.  It 
must  be  conceded,  it  would  seem,  that  there  is  a  holding  out  to 
creditors  that  Cooper  has  $25,000  invested  in  the  business.  If 
the  loss  is  charged  against  him,  obviously,  he  will  have  only 
$18,050.76.  The  inference  to  be  drawn  from  the  law  therefore 
is  that  the  general  partners  could  hold  him  for  the  loss  and  that 
the  amount  due  from  him  might  reasonably  be  considered  as  an 
asset  available  for  the  liquidation  of  liabilities. 

As  the  first  step  in  the  solution  of  the  problem  a  working 
sheet  should  be  prepared,  taking  as  a  basis  the  trial  balance  and 
placing  against  it  the  estimated  reali.-^ation.  The  working  sheet 
is  desirable  in  order  that  the  figures  may  be  proven  and  a  clear 
idea  of  the  situation  obtained  before  beginning  work  on  the 
statements. 

189 


Elementary  Accounting  Problems 

WORKING  SHEET  FOR  STATEMENT  OF  AFFAIRS  AND 

DEFICIENCY  ACCOUNT 

Estimated  real- 
Trial      ization  and 
Debits  balance    liquidation    Increases    Decreases 

Equipment $  80,972.50  $  15,000.00  $  65,972.50 

Building   material    i8,435-73      15,27500  3.160.73 

Invested  in  contracts   125,942.36    150,000.00  $  24,057.64 

Cash     5,875-80        5,87580 

Due  from  customers 117,226.15      67,226.15  50,000.00 

Due  from  subcontractors   ...       1,520.37        1,200.00  320.37 

Notes   receivable    25,000.00      25,000.00 

Accrued  interest  on  notes  rec.         136.27  136.27 

Rent  paid  in  advance  1,000.00        1,000.00 

Cost  of  contracts  187,536.24  187,536.24 

Salaries — office    20,946.32  20,946.32 

Expenses — office     8,314.69  8,314.69 

Interest     1,236.13  1,236.13 

Total    debits $594,142.56 

Due  from  special  partner  ...  6,949.24       6,949.24 

Total  estimated  assets...  $287,662.46 

Deficit    19,519.16 

Total    $307,181.62 

Credits 

Wages  accrued  $  12,862.15  $  12,862.15 

Salaries  accrued  1,243.74        1,243.74 

Due  supply  houses 198,891.30    198,891.30 

Notes  payable   85,000.00      85,000.00 

Interest     accrued     on     notes 

payable.    126,79          126.79 

Reserve  for  depn,  equipment  35,348.27                         35,348.27 

Capital : 

J.   D.   Chauncey    23,256.64                          23,256.64 

P.  H.  Bennett  22,177.25                          22,177.25 

J.  W.  Cooper  (special)    ...  25,000.00                         25,000.00 

Income  from  contracts   190,236.42                        190,236.42 

Total    credits    $594,142.56 

Estimated  cost  of  completing 
contracts     9,057.64  9,057.64. 

Total  estimated  liabilities  $307,181.62 

$327,025.46  $346,544.62 

$  19,519-16 

In  looking  at  the  above  it  will  be  seen  that  the  net  decrease, 
shown  at  the  bottom  on  the  right,  amounts  to  $19,519.16,  the 
same  as  the  deficit.    A  glance  at  the  working  sheet  will  also  show 

190 


Problem  Number  Twenty-Two 

that  all  the  information  necessary  to  the  preparation  of  the 
statements,  except  preferences  and  offsets  is  clearly  set  forth. 
The  first  two  columns  give  the  data  for  the  statement  of  affairs, 
while  the  third  and  fourth  provide  that  for  the  deficiency  account. 
It  may  be  difficult  to  understand  why  the  reserve,  the  capital 
accounts  and  the  income  from  sales  are  shown  as  increases  when 
obviously  this  mechanical  procedure  is  the  reverse  of  that  fol- 
lowed above  in  the  case  of  the  assets.  Equipment,  for  example, 
appears  in  the  trial  balance  as  $80,972.50,  while  in  the  estimated 
realization  and  liquidation  column  it  appears  as  $15,000,  hence 
the  difference  appears  in  the  decrease  column.  The  reserve  for 
depreciation  appears  in  the  trial  balance  as  $35,348.27,  while  it 
is  missing  from  the  estimated  realization  and  liquidation  column. 
Apparently  following  the  line  of  reasoning  with  regard  to  equip- 
ment it  has  decreased;  still  the  difference  is  shown  as  an  in- 
crease. It  is  probable  that  this  matter  can  be  cleared  up  if 
increases  and  decreases  are  considered  with  regard  to  their  re- 
lation to  capital.  As  a  result  of  the  above  changes  has  capital 
increased  or  decreased?  Concerning  equipment  surely  it  has 
decreased.  If  the  reserve  is  released  capital  has  increased.  In- 
come from  sales  increases  capital.  If  the  deficit  is  to  be  ascer- 
tained then  capital,  which  is  available  for  the  liquidation  of  the 
liabilities,  must  be  brought  into  play  and  treated  like  any  increase. 
The  item  of  rent  paid  in  advance  may  have  been  treated 
somewhat  arbitrarily  and  the  matter  may  be  open  to  discussion. 
If  the  rent  has  been  paid  in  advance,  of  necessity  there  must 
be  a  lease  covering  a  period  extending  into  the  future.  Since 
in  the  present  instance  the  receiver  is  to  continue  the  business 
it  is  to  be  presumed  that  he  will  be  able  to  work  out  the  amount 
paid  in  advance,  which  probably  does  not  cover  any  extended 
period.  By  virtue  of  this  fact  creditors  will  receive  more  than 
they  would  if  the  payment  had  not  been  made  and  he  were 
obliged  to  use  other  funds  for  this  purpose.  It  is,  therefore, 
worth  as  an  asset  $1,000.  Were  the  business  to  be  wound  up 
and  the  use  of  the  property  discontinued  by  the  receiver  he 
would  doubtless  be  able  to  realize  on  the  prepayment  either  by 
selling  the  lease  or  subletting.  It  is  true  that  the  full  amount 
might  be  reduced  to  the  extent  of  commission  paid  to  real  estate 
brokers,  but  since  such  a  reduction  is  a  matter  of  speculation, 

191 


Elementary  Accounting  Problems 

it  seems,  in  the  absence  of  any  specific  information  on  the  point 
to  take  it  at  its  face  value. 

Nothing  is  said  in  the  problem  concerning  the  division  of 
profits  or  losses  between  the  two  general  partners.  The  general 
rule  in  copartnership  problems,  as  well  as  in  copartnership  con- 
tracts, where  the  manner  of  division  is  not  specified,  is  that  the 
profits  and  losses  shall  be  divided  equally  in  accordance  with 
the  number  of  partners.  If  this  rule  is  to  be  applied  here,  after 
deducting  one-fourth  of  the  total  which  is  applicable  to  the  special 
partner  the  amount  remaining  will  be  equally  divided  between 
the  other  two  partners.  Consequently  it  is  to  be  presumed  that 
the  drawings  of  the  partners  which  were  included  in  the  amount 
due  from  customers  are  to  be  charged  against  them  in  equal 
amounts  and  that  subsequently  the  funds  which  they  raised  un- 
der pressure  were  credited  to  them  in  the  same  way. 


192 


Problem  Number  Twenty-Two 


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Elementary  Accounting  Problems 

RECEIVER    FOR    CHAUNCEY,    BENNETT    &    COOPER 

Deficiency  Account  as  of  June  3,  1912 

Adjustment     of    partners  Capital $70,433.89 

accounts $50,000.00       Balance 7,2/^3-07 

Loss  on  operations 27,7^.^ 

%77,79^-<^  %77,7^'9^ 

Balance $  7,Z^Z'07 

Estimated  losses  on  real-  Estimated  profit  on  con- 
ization :                                                        tract $15,000.00 

Subcontractors  320.37  Due  from  J.  W.  Cooper. .     6,949.24 

Building  material 3,160.73 

Equipment 30,624.23       Deficit 19,519.16 

$41,468.40  $41,468.40 


In  working  problem  22-A,  the  nominal  accounts  should  be 
closed  out  before  taking  up  the  transactions  for  the  receiver  since 
it  is  the  intention  to  show  through  the  statement  of  income  and 
profit  and  loss  the  efficiency  of  the  receiver.  To  merge  with  his 
operations  those  corresponding  to  the  period  before  he  took 
charge  would  be  eminently  unfair.  The  rent  paid  in  advance 
should  be  treated  as  having  expired  during  the  period  of  the 
receivership. 


pROBi^EM  No.  22-A  (Practice)' 

From  the  text  of  problem  No.  22  prepare: 
(a)   Balance  sheet,  December  31,  1912. 
{h)  Statement  of  income  and  profit  and  loss  for  the  period 
ended  on  said  date. 


194 


Problem  Number  Twenty-Three 

PROBLEM  No  23 
Demonstration 

A  receiver  in  bankruptcy  having  been  appointed  for  W.  B. 
Tileson,  who  has  been  engaged  in  a  trading  business,  it  is  de- 
sired to  know,  approximately,  the  percentage  which  unsecured 
creditors  will  receive  on  their  claims. 

A  balance  sheet  at  June  30,  1912,  is  as  follows: 


A ssets 

Land   $  25,000.00 

Buildings  175,000.00 

Machinery  and  tools 187,500.00 

Auto  trucks   15,000.00 

Furniture  and  fixts 8,000.00 

Stock-Altair  Wheel  Co.    . .  45,000.00 
N.  Y.  Central  stock — 200 

shares  at  131-1/8 26,225.00 

Merchandise-inventory    . .  20,000.00 

Cash  in  hand   752.00 

Cash  in  bank   1,856.00 

Accounts  receivable 27,843.00 

Loan-Altair  Wheel  Co.  . . .  90,000.00 

Notes  receivable   15,000.00 

Accrued  int.  on  notes  re- 
ceivable    251.00 

Unexpired  insurance 300.00 

Total $637,727.00 


Liabilities  and  Capital 

Bond  and  mtge.  on  land 

&  bldgs  $125,000.00 

Int.  ace.  on  B/M 6,250.00 

Taxes  accrued 1,500.00 

Wages  accrued 275.00 

Accounts  payable 175,725.00 

Notes  payable 200,000.00 

Int.  ace.  on  notes  payable  12,000.00 
Reserve  for  depreciation: 

Buildings  35,000.00 

Machinery  and  tools       45,477.00 

Auto  trucks 12,500.00 

Furniture  and  fixtures       4,000.00 
W.  B.  Tileson,  capital        20,000.00 


Total  $637,727.00 


The  following  appraisals  and  estimates  of  values  have  been 
made:  land,  $30,000;  buildings,  $135,000;  machinery  and  tools, 
$85,000;  auto  trucks,  $2,000;  furniture  and  fixtures,  $1,200; 
merchandise-inventory,  $12,000;  accounts  receivable,  good,  $20,- 
000;  uncollectible,  $2,616;  doubtful,  $5,277,  but  estimated  to 
realize,  $3,000.  Notes  receivable  and  interest  are  secured  by  150 
shares  of  Louisville  and  Nashville  stock,  quoted  at  156.  The 
cash  in  hand  contains  an  I.  O.  U.  of  W.  B.  Tileson  in  the 
amount  of  $75.  Of  the  New  York  Central  stock,  which  is 
quoted  at  150,  175  shares  are  pledged  to  secure  notes  payable 

195 


Elementary  Accounting  Problems 

of  $20,000,  with  interest  amounting  to  $i,ooo.    Accounts  payable 
to  the  extent  of  $5,362  are  secured  by  a  chattel  mortgage  on  mer- 
chandise of  $3,000.     The  unexpired  insurance  figured  on  the 
short  rate  basis  will  yield  $85.    Tileson's  personal  estate  consists 
of  vacant  lots  at  Ampere,  New  Jersey,  valued  at  $1,000,  and  an 
insurance  policy  for  $5,000,  the  cash  surrender  value  of  which 
is  $3,000,  while  his  personal  and  household  debts  amount  to  $450. 
The  balance  sheet  of  the  Altair  Wheel  Company  shows  assets, 
$150,000;  liabilities,  $100,000;  capital  stock  outstanding,  $50,000. 
The  assets  have  been  appraised  at  $80,000. 
From  the  foregoing  prepare : 
(a)   Statement  of  affairs  as  of  June  30,  1912. 
{h)  Deficiency  account. 

S01.UT10N  TO  Probi^^m  No.  23  (Demonstration) 

In  so  far  as  the  method  is  concerned  this  problem  may  be 
solved  the  same  as  the  preceding.  The  content  of  the  problem 
differs  slightly  in  that  no  nominal  accounts  appear  in  the  trial 
balance;  nor  is  there  anything  in  the  facts  which  follow  the 
trial  balance  which  calls  for  the  setting  up  of  any  nominal  ac- 
counts. 

The  form  of  the  working  sheet  remains  the  same.  In  general 
it  should  cause  no  trouble.  In  three  or  four  particulars  it  will 
undoubtedly  be  found  vexatious.  For  example  when  one  at- 
tempts to  supply  the  figure  for  estimated  realization  and  liquida- 
tion opposite  "stock-Altair  Wheel  Company"  the  question  of  its 
estimated  value  arises.  Reference  to  the  last  few  lines  of  the 
paragraph  preceding  the  requirements  shows  it  to  be  worthless. 
According  to  the  balance  sheet  of  the  Altair  Wheel  Company  the 
stock  is  worth  par.  When,  however,  it  develops  that  the  assets 
have  been  appraised  at  $80,000  the  aspect  changes  entirely.  The 
extensive  shrinkage  in  the  assets  not  only  wipes  out  the  equity 
of  the  stockholders  but  leaves  a  deficit  of  $20,000  which  must 
be  sustained  by  creditors.  Hence  it  will  be  seen  that  the  stock 
may  not  be  depended  upon  to  produce  anything.  In  some  states 
where  stock  is  assessable  for  the  benefit  of  creditors  or  in  case 
the  stock  were  not  fully  paid  a  further  liability  on  the  part  of 
Tileson  might  even  attach  to  such  stock  ownership. 

The  loan  made  to  the  Altair  Wheel  Company  is  carried  on  the 

196 


Problem  Number  Twenty-Three 

books  at  $90,000.  If  there  are  only  $80,000  worth  of  assets  to 
meet  $100,000  worth  of  obUgations  it  is  obvious  that,  if  the 
assets  realize  as  much  as  is  estimated  and  the  liabilities  remain 
the  same,  creditors  will  be  obliged  to  suffer  a  loss  of  20%.  If 
this  percentage  is  applied  against  the  loan  on  Tileson's  books  it 
will  be  seen  that  he  or  the  receiver  will  not  realize  more  than 
$72,000. 

Concerning  the  I.  O.  U.  of  W.  B.  Tileson,  some  slight  hesita- 
tion may  be  experienced.  There  is  nothing  said  with  regard  to 
the  value  of  the  paper  in  question.  It  is  not  specifically  men^ 
tioned  as  being  worthless.  The  inference,  taking  all  the  facts 
into  consideration,  is  that  it  should  not  be  given  a  value.  The 
cash  is  therefore  decreased  $75. 

Notes  receivable  and  interest  are  secured  by  150  shares  of 
Louisville  and  Nashville  stock  quoted  at  156.  The  notes  and  in- 
terest amount  collectively  to  $15,251.  The  one  hundred  and  fifty 
shares  of  stock  at  one  hundred  and  fifty-six  are  worth  $23,400. 
From  these  facts  it  may  be  concluded  that  the  notes  and  in- 
terest will  bring  their  face  value.  The  mistake  should  not 
be  made  of  taking  up  the  stock  in  the  estimated  realization 
and  liquidation  column.  It  should  be  remembered  that  the 
stock  in  question  is  not  the  property  of  Tileson.  It  is  merely 
deposited  with  him  as  security  for  certain  notes.  If  perchance  the 
notes  were  not  paid  and  he  or  the  receiver  were  to  sell  the  stock 
at  the  market  price  of  156  the  amount  of  the  notes  and  interest, 
namely,  $15,251  would  be  deducted  from  the  proceeds  of  $23,- 
400  and  the  balance  of  $8,149  paid  over  to  the  owner  of  the  stock. 

The  working  sheet,  concerning  which  there  will  probably  be 
no  other  new  questions,  follows: 


197 


Elementary  Accounting  Problems 


WORK  SHKBT  FOR  STATEMENT  OF  AFFAIRS  &  DEFICIENCY  AC- 
COUNT 


DEBITS 


Trial 
Balance 


Estimated 
Realiza- 
tion &  Li- 
quidation 


Increases 


Decreases 


Land  

Buildings   

Machinery  and  tools  

Auto  trucks   

Furniture  &  fixtures 

Stock- Altair  Wheel  Co 

New  York  Central  stock  . . 
Merchandise-inventory  .  .  . 

Cash- in  hand  

Cash  in  bank  

Accounts  receivable     

Loan- Altair  Wheel  Co.   .  .  . 

Notes  receivable 

Ace.  int.  on  notes  rec 

Unexpired  insurance 

Total  debts  

Lots — Ampere,  N.  J 

Personal  insurance  policy   . 

Total  estimated  assets  . . 
Deficit 

Total 

CREDITS 

Bond  &  Mortgage  on  land 

and  buildings 

Int.  ace.  on  B/M 

Taxes  accrued 

Wages  accrued  

Accounts  payable 

Notes  payable 

Interest  ace.  on  N/P 

Res.depr.  -bldgs 

do     do  -mach.  &  tools   . 

do     do  -auto  trucks   .  .  . 

do  do  -furn.  &  fixt.  . . . 
W.  B.  Tileson,  capital 

TOTAL  CREDITS  .  . 
Person  &  household  debts  . 

Total  estimated  liabilities 


$  25,000.00 

$  30,000.00 

175,000.00 

135,000.00 

187,500.00 

85,000.000 

15,000.00 

2,000.00 

8,000.00 

1,200.00 

45,000.00 

-  - 

26,225.00 

30,000.00 

20,000.00 

12,000.00 

752.00 

677.00 

1,856.00 

1,856.00 

27,843.00 

23,000.00 

90,000.00 

72,000.00 

15,000.00 

15,000.00 

251.00 

251.00 

300.00 

85.00 

$637,727.00 

1,000.00 

3,000.00 

$412,069.00 

109,131.00 

$521,200.00 

$125,000.00 

125,000.00 

6,250.00 

6,250.00 

1,500.00 

1,500.00 

275.00 

275.00 

175,72500 

175,725.00 

200,000.00 

200,000.00 

12,000.00 

12,000.00 

35,000.00 

45,477.09 

12,500.00 

4,000.00 

20,000.00 

$637,727.00 

450.00 

$521,200.00 

$  5,000.00 


3,775.00 


1,000.00 
3,000.00 


35,000.00 
45,477.00 

12,500.00 

4,000.00 

20,000.00 


$129,752.00 


)  40,000.00 
102,500.00 

13,000.00 
6,800.00 

45,000.00 

8,000.00 

75.00 

4,843.00 
18,000.00 


215.00 


450.00 


$238,883.00 

$109,131.00 


198 


Problem  Number  Twenty-Three 

The  statement  of  affairs  presented  below  is  about  as  complete 
as  will  ordinarily  be  found.  It  offers  an  unusually  good  oppor- 
tunity to  study  "offsets,"  or  "contras"  as  they  are  sometimes 
called.  Take  for  example  the  New  York  Central  stock.  Two 
hundred  shares  were  owned.  One  hundred  and  seventy-five 
shares  were  pledged  to  secure  notes  payable  and  interest.  Ac- 
cordingly the  block  of  stock  is  divided  into  two  parts;  one  of 
twenty-five  shares  and  the  other  of  one  hundred  and  seventy- 
five.  The  unpledged  portion  is  set  up  on  the  asset  side,  the  book 
value  and  estimated  to  realize  being  one-eighth  of  the  respective 
values  applicable  to  two  hundred  shares. 

The  one  hundred  and  seventy-five  shares  being  pledged  to 
secure  notes  payable  and  interest  of  $21,000  are  carried  to  the 
liabilities'  side  of  the  statement  at  the  market  price  of  150  or 
$26,250.  Since  this  latter  amount  is  greater  than  the  amount 
of  indebtedness  the  equity  of  $5,250  is  carried  back  to  the  asset 
side  where  it  appears  in  the  estimated  to  realize  column. 


199 


Elementary  Accounting  Problems 


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,201 


'Elementary  Accounting  Problems 

W.  B.  TILESON 
Deficiency  Account 


Household  debts $       450.00  Capital  $  20,000.00 

Personal  estate: 

Land  1,000.00 

Insurance  policy 3,000.00 

5,000.00  Estimated     increase     in 

value  of  land  5,000.00 

Estimated  increase  in 
57,023.00       value  of  securities   ....       3,775-00 


Estimated  losses: 

Buildings   .  .  .  .$  40,000 
Less-reserve  . .     35,000 

Mach  &  tools    $102,500 
Less-reserve  45,477 


Auto  trucks      $  13,000 
Less-reserve  12,500 


Deficit   109,131.00 


Fum.  &  fixt.     $    6,800 
Less-reserve  4,000 


500.00 
2,800.00 


Stock-Altair 

Wheel  Co 45,000,00 

Cash  7500 

Merchandise 8,000.00 

Accoimts  receivable  .  . .  4,843.00 

Loan-Altair  Wheel  Co.  18,000.00 

Unexpired  insurance  ..  215.00 


$141,906.00 


$141,906.00 


ProbIvEm  No.  23A  (Practice) 

You  are  engaged  by  T.  M.  Jarvis,  receiver  in  bankruptcy 
for  H.  M.  Carley,  to  prepare  a  statement  which  will  enable  him 
to  announce  to  the  unsecured  creditors  the  approximate  liquida- 
tion dividend  which  they  will  receive. 

A  balance  sheet  at  September  30,  1912,  is  as  follows : 


Assets 

Land  $  30,000.00 

Buildings 180,000.00 

Machinery  and  tools 65,000.00 

Horses,  wagons  &  har- 
ness    2,500.00 

Furniture  and  fixtures  8,000.00 

Stock-Auto  Wrench  Co.   . .  50,000.00 
D.    L.    &    W.    stock- 1 50 

shares  at  138  3/4  19,312.50 

Merchandise-inventory  ...  23,782.95 

Cash  in  hand 342.86 

Cash  in  bank  1,235.47 

Accounts  receivable  351836.25 

Loan- Auto  Wrench  Co.  . . .  100,000.00 

Notes  receivable  12,000.00 

Int.  ace.  on  notes  rec 127.50 

Unexpired  insurance  240.00 


Liabilities  &  Capital 
Bond  and  mortgage  pay- 
able, lands  and  build- 
ings   $150,000.00 

Interest  ace.  on  B/M   .  .  .       2,250.00 

Taxes  accrued 3,000.00 

Wages  accured 7,825.00 

Accounts  payable  186,783.15 

Notes  payable 105,000.00 

Int.  ace.  on  notes  payable        1,050.00 
Reserve  for  depreciation : 

Buildings  43,826.00 

Machinery  and  tools  ..      12,784.00 
Horses,  wagons  &  har- 
ness     250.00 

Furniture  and  fixtures  1,275.00 

H.  M.  Carley,  capital  . . .     14,334.38 


Total   $528>377-53  Total   $528,377.53 


202 


Problem  Number  Twenty-Three 

The  following  appraisals  and  estimates  are  made :  Land,  $25,- 
000;  buildings,  $135,000;  machinery  and  tools,  $40,000;  horses, 
wagons  and  hari^ss,  $750;  furniture  and  fixtures,  $250;  mer- 
chandise, $15,000;  accounts  receivable,  good,  $18,426.12;  uncol- 
lectible, $12,372.28 ;  doubtful,  $5,037.85,  but  estimated  to  realize, 
$2,000.  Notes  receivable  and  interest  are  secured  by  100  shares 
of  American  Real  Estate  Company  pfd.  at  125.  The  cash  in 
hand  contains  a  counterfeit  $10  bill.  Of  the  150  shares  of  D.  I^. 
&  W.  which  is  quoted  at  140^^,  shares  to  the  extent  of  100  are 
pledged  to  secure  $10,132.50  of  notes  payable  and  interest.  Ac- 
counts payable  to  the  extent  of  $4,875.23  are  partially  secured 
by  a  chattel  mortgage  on  merchandise.  The  short  rate  for  in- 
surance is  .0673.  Carley's  personal  estate  consists  of  improved 
property  on  I^ong  Island  valued  at  $7,500  but  subject  to  a  mort- 
gage of  $3,500,  and  household  debts  in  the  amount  of  $325.  The 
balance  sheet  of  the  Auto  Wrench  Company,  in  which  Carlcy 
owns  the  majority  of  the  stocks,  shows  assets,  $250,000 ;  liabilities, 
$175,000;  capital  stock  outstanding,  $75,000.  The  assets  have 
been  appraised  at  $140,000. 

From  the  foregoing  prepare: 

(a)  Statement  of  affairs. 

(b)  Deficiency  account, 


203 


Elementary  Accounting  Problems 

PROBLEM  No.  24 
Demonstration 


Arthur  Dixon,  the  trustee  for  W.  B.  Tileson,  proceeded  to 
wind  up  the  affairs  of  the  bankrupt  and  effected  the  following 
transactions :  L,and  and  buildings  (subject  to  the  mortgage,  and 
interest  of  $6,371.54,  and  taxes  accrued  of  $1,528.50)  were  sold 
for  $175,000;  the  machinery  and  tools  brought  $80,000;  auto 
trucks,  $1,500;  furniture  and  fixtures,  $975;  merchandise,  $15,- 
486.27;  accounts  receivable,  $22,248.74;  150  shares  ly.  &  N. 
stock  sold  at  162^-1/8;  150  shares  N.  Y.  Central  sold  by 
creditor  at  152^-1/8;  50  shares  sold  by  trustee  at  152  1/8-1/8; 
insurance  unexpired,  $63.75;  ^^^s  Ampere,  N.  J.,  sold  for 
$1,200;  life  insurance  policy,  $3,017.32;  Altair  Wheel  stock  was 
a  total  loss;  interest  accrued  on  the  secured  notes  payable  when 
settled  was  $1,005.81 ;  accrued  interest  on  notes  receivable  when 
collected,  $257.86;  there  were  87  creditors;  liquidation  com- 
pleted; office  expenses  of  receiver,  $5,321.45;  stenographers*  and 
witness  fees,  $575  (loan  Altair  Wheel  Co.  produced  $72,000)  ; 
trustee's  fees,  $2,700;  referees's  fees  $2,300,  no  further  interest 
to  be  accrued. 

Prepare : 

Skeleton  ledger  accounts  showing  books  of  the  trustee.  Show 
the  percentage  which  unsecured  creditors  received  on  their 
claims. 

SOLUTION  TO  PROBLEM  No.  24   (DEMONSTRATION) 
Land 


$25,000.00         I       $25,000.00 
Buildings 


$175,000.00       I      $175,000.00 
Machinery  and  Tools 


Auto 

Trucks 

$15,000.00 

$12,500.00 
1,500.00 
1,000.00 

$15,000.00 

$15,000.00 

$187,500.00 


$187,500.00 


$  45,477.00 

80,000.00 
62,023.00 


Furniture  and  Fixtures 


,000.00 


$187,500.00 


$8,000.00 


$4,000.00 

97500 

3,025.00 


;,ooo.oo 


204 


Problem  Number  Twenty-Four 


Stock- Altair  Wheel  Co 


$45,000.00         I      $45,000.00 
N.  Y.  Central  Stock 


$26,225.00 
4,268.75 


$30,493.75 


$30,493-75 


Merchandise  — Inventory 


$20,000.00 


$20,000.00 


$15,486.27 
4»5i3-73 


$20,000.00 


Cash  in  Hand 


$752.00  I       $752.00 

Cash  in  Bank 


$     1,856.00 

752.00 

42,099.96 

120,210.01 

15,257-86 

1,887.94 

7,600.00 

76,281.07 

$265,944-84 


$  10,896.45 

3,000.00 

275.00 

Bal  251,773.39 


$265,944.84 


$251,773-39 

Accounts  Receivable 


$27,843.00 


$27,843.00 


$22,248.74 
5,594-26 


$27,843.00 


Loan  Altair  Wheel  Co. 


$90,000.00 


$90,000.00 


$72,000.00 
18.000.00 


$90,000.00 


Notes  Receivable 


$15,000.00         I       $15,000.00 
Ace.  Int.  On  Notes  Rec. 


$251.00 


$251.00 


Unexpired  Insurance 


$300.00 


$22,893-75 
7,600.00 


$300.00 


$63,75 
236.25 


$300.00 


Lots — Ampere,  N.  J. 


$1,000.00 
200.00 


$1,200.00 


$1,200.00 


$1,200.00 


Life  Insurance  Policy 


$3,000.00 
17.32 


$3,017.32 


$3,017.32 


$3,017.23 


Bond  &  Mtge.  on  Land  &  Buildings 


$125,000.00       I       $125,000.00 
Int.  Ace.  on  Bond  and  Mtge. 


$6,371.54 


$6,371.54 


$6,250.00 
121.54 


$6,371.54 


Taxes  Accrued 


$1,528.50 


$1,528.50 


$1,500.00 
28.50 


$1,528.50 


Wages  Accrued 


$275.00 


Accounts  Payable 


$275.00 


$3,000.00 
Bal.  $172,725.00 


$175,72500 


$175,725.00 


$175,725.00 


$172,725.00 


Notes  Payable 


$  20,000.00 
Bal.  180,000.00 


$200,000.00 


$200,000.00 


$200,000.00 


$180,000.00 


205 


Elementary  Accounting  Problems 


Int.  Ace.  on  Notes  Payable 


$  1,000.00 
Bal.  11,000.00 


$12,000.00 


$12,000.00 


$12,000.00 


$11,000.00 
Reserve  for  Depn.  of  Bldgs. 


$35.00000         I      $35,000.00 
Reserve  for  Depn.  Mach.  &  Tools 


$45,477.00         I      $45,477-00 
Reserve  for  Depn.  Auto  Trucks 


$12,500,00         I      $12,000.00 
Reserve  for  Depn.  Fum.  &  Fixt. 


$4,000.00 


$4,000.00 


W.  B.  Tileson,  Capital 


i5i35,95i-6i 


$135,951-61 


$  20,000.00 

3,550.00 

Bal.   112,401.61 


$135,951.61 


$112,401.61 
Personal  and  Household  Debts 


$450.00 


Vendee 


$175,000.00       I      $175,000.00 
Lane  and  Buildings 


$200,000.00 
10,000.00 


$210,000.00 


$175,000.00 
35,000.00 


$210,000.00 


Fees  and  Expenses  of  Receivership 


$10,896.45 


$10,896.45 


Reai,ization  and  Liquidation  Account 


Int.  on  B/M  $       121.54  Int.  on  Notes  rec.   ... 

Int.  on  notes  pay  5.81  Land  &  bldgs 

Taxes 28.50  N.  Y.  Central  stock  . 

Mach.  &  tools 62,023.00  Lots — ^Ampere,  , 

Auto  trucks 1,000.00  Life  Ins.  policy  


$  6.86 

10,000.00 

4,268.75 

200.00 

17-32 

Fum.  &  fixt 3,025.00    W.  B.  Tileson,  capital...   135,951.61 

Stock- Altair  Wheel  Co.  . . .     45,000.00 

Merchandise  4»5i3-73 

Accoimts  rec 5,594.26 

Loan— Altair  W.  Wheel 

Co 18,000.00 

Unexpired  ins 236.25 

Fees  &  exp.  of  receiver  . . .     10,896.45 


$150,444.54 


$150,444.54 


JouRNAi,  Entries 

Lots — Ampere,  New  Jersey  $    1,000.00 

Life  Insurance  Policy  3,000.00 

To  Personal  and  Household  Debts $       450.00 

W.  B.  Tileson,  capital  3.550.oo 

To  place  the  personal  assets  and  liabilities  of  W.  B. 
Tileson  on  the  books  of  the  business. 

Cash  in  bank  752.00 

To  Cash  in  hand  752.00 


206 


Problem  Number  Twenty-Four 

Vendee 175,000.00 

To  Land  and  buildings 175,000.00 

For  sale  price  of  land  and  buildings. 

Land  and  buildings 200,000.00 

To  Land  25,000.00 

Buildings 175,000.00 

To  consolidate  the  two  accounts 

Reserve  for  depreciation  of  bldgs 35,000.00 

To  Land  and  buildings   35,000.00 

To  offset  the  cost  of  land  and  buildings  by  the  re- 
serve for  depreciation  of  buildings 

Realization  and  liquidation  account 150.04 

To  Interest  accrued  on  B/M 121.54 

Taxes  accured  28.50 

For  accrual  of  interest  and  taxes  for  the  period 
from  June  30  to  date  of  sale. 

Bond  and  mortgage  on  land  and  bldgs 125,000.00 

Int.  accrued  on  bond  and  mtge 6,371.54 

Taxes  accrued   1,528.50 

Cash 42,099.96 

To  Vendee  175,000.00 

To  record  settlement  by  vendee. 

Reserve  for  depreciation — Mach.  and  tools 45,477.00 

"         "  "     autotrucks  12,500.00 

"         "  "     furn.  and  fixt 4,000.00 

To  Machinery  and  tools 45,477.00 

Auto  trucks  12,500.00 

Furniture  and  fixtures  4,000.00 

To  close  out  reserves  and  set  up  book  values  of 
above  assets. 

Cash 120,210.01 

To  Machinery  and  tools  80,000.00 

Auto  trucks  1,500.00 

Furniture  and  fixtures 975-oo 

Merchandise   15,486.27 

Accounts  receivable 22,248.74 

Cash  15,257.86 

To  Notes  receivable   15,000.00 

Accrued  int.  on  notes  receiv 251.00 

Real,  and  liq.  a/c   (ace.  int.  June  30  to» 

date  of  sale)   6.86 

For  sale  of  150  shares  L  &  M  stock  at 

162  1/2— 1/8 $24,356.25 

Amount  paid  by  broker  to  maker  of 

notes 9.098.39 

Amount  paid  to  Receiver $15,257.86 


Notes  payable  20,000.00 

Interest  ace.  on  notes  payable   1,000.00 

Real,  and  liq.  a/c,  (ace.  int.  June  30  to  date  of 

sale)  5.81 

207 


Elementary  Accounting  Problems 

Cash 1,887.94 

To  New  York  Central  stock   22,893.75 

For  sale  of  150  shares  N.  Y.  Central  stock 

at  152  3/4—1/8   $22,893.75 

I<ess  deducted  by  broker  for  creditor  ...  21,005.81 

Balance  paid  to  receiver $  1,887.94 

Cash  7,600.00 

To  New  York  Central  stock  7,600.00 

For  50  shares  of  N.  Y.  Central  stock  sold  by  the 
trustees  at  152  1/8 — 1/8   

Cash  76,281.07 

To  Unexpired  insurance 63.75 

Lots — Ampere,  N.  J 1,200.00 

Life  insurance  policy 3,017.32 

Loan — Altair  Wheel  Co 72,000.00 

Fees  and  expenses  of  receivership  10,896,45 

To  Cash  10,896.45 

Office  expenses  $  5,321.45 

Stenographers'  and  witness  fees 5  75  00 

Trustee's  fees 2,700.00 

Referee's  fees  2,300.00 

$10,896.45 

Accounts  payable 3,000.00 

To  Cash  3,000.00 

For  claim  of  $3,000  covered  by  a  chattel  mortgage 
on  merchandise  of  $5,362 

Wages  accrued  275.00 

To  Cash  275.00 

Land  and  buildings 10,000.00 

New  York  Central  stock  4,268.75 

Lots — Ampere,  N.  J 200.00 

Life — insurance  policy  17. 32 

To  Realization  and  liquidation  a/c 14,486.07 

Realization  and  liquidation  a/c  150,288.69 

To  Machinery  and  tools 62,023.00 

Auto  trucks  1,000.00 

Furniture  and  fixtures 3,025.00 

Stock — Altair  Wheel  Co .»  45,000.00 

Merchandise  4,5 13-73 

Accounts  receivable 5,594.26 

Loan — ^Altair  Wheel  Co 18,000.00 

Unexpired  insurance 236.25 

Fees  and  expenses  of  receivership  10,896.45 

W.  B.  Tileson,  capital  I35,95i-6i 

To  Realization  and  liquidation  account  ...  135,951.61 
To  close  reahzation  and  liquidation  account  to  ac- 
count of  proprietor. 

208 


Problem  Number  Twenty-Four 

Very  few  comments  seem  to  be  necessary  in  this  solution. 
Most  complications  arise  in  connection  with  the  transactions  of 
the  receiver.  These  transactions  are  journalized.  The  journal 
entries  are  made  sufficiently  explicit  so  that  comment  on  the 
transactions  would  seem  to  be  somewhat  superfluous.  Most 
benefit  will  be  derived  by  studying  the  transactions  in  connection 
with  the  journal  entries  and  tracing  the  posting  of  the  journal 
entries  to  the  respective  ledger  accounts.  If  this  is  done  the 
manner  in  which  the  problem  has  been  solved  will  be  apparent. 

In  arriving  at  the  percentage  which  unsecured  creditors  should 
receive  on  their  claims,  a  trial  balance  of  the  skeleton  ledger  ac- 
counts after  closing  is  desirable.    The  trial  balance  is  as  follows : 

Trial  Balance  (After  Closing) 

Cash  $251,773.39    A/cs  payable  $172,725.00 

Deficit  112,401.61     Notes  "   180,000.00 

Int.  ace.  N/P       11,000.00 

Personal  debts 450.00 

$364,17500  $364,175.00 


From  the  above  trial  balance  it  will  be  seen  that  the  total 
amount  due  unsecured  creditors  is  $364,175  while  there  re- 
mains in  cash  available,  to  meet  these  claims,  only  $251,773.39. 
Dividing  this  amount  representing  cash  by  the  total  amount  due 
unsecured  creditors  it  will  be  seen  that  they  should  receive 
69.13  plus  %  of  their  claims. 


K 


Problem  No.  24  (Practice) 

The  following  are  the  transactions  effected  by  T.  M.  Jarvis, 
trustee  for  the  bankrupt  estate  of  H.  M.  Carley : 

Land  and  buildings  sold  for  $162,500,  the  purchasers  paying 
the  taxes  for  the  year  of  $3,250,  and  assuming  the  mortgage  with 
accrued  interest  of  $2,625 ;  machinery  and  tools,  $38,525 ;  horses, 
wagons  and  harness,  $525;  furniture  and  fixtures,  $260;  mer- 
chandise, $14,813.26;  accounts  receivable,  $20,409.63;  100  shares 
of  American  Real  Estate  Company  preferred  sold  at  122^ ;  100 
shares  D.  I^.  &  W.  sold  by  creditor  at  145;  50  shares  sold  by 
trustee  at  145  ^  ;  insurance  cancelled  at  .0492 ;  property  on  Long 
Island  sold  for  $4,500,  the  purchaser  assuming  the  mortgage; 
Auto  Wrench  Company  stock  sold  for  $5,000.    The  interest  ac- 

209 


Elementary  Accounting  Problems 

crued  on  the  secured  notes  payable  when  settled  was  $145.70; 
accrued  interest  on  notes  receivable  $132.50.  There  were  95 
creditors.  The  office  expenses  of  the  receiver  were  $6,217.52; 
stenographers'  and  witness  fees,  $435.22.  I^oan  to  Auto  Wrench 
Co.  paid  in  full  Referee's  fees,  $2,400.  Trustee's  fees,  $2,600. 
No  interest  to  be  accrued. 

Prepare : 

Skeleton  ledger  accounts  showing  books  of  the  trustee.  What 
percentage  was  paid  to  unsecured  creditors? 


210 


Problem  Number  Twenty-Five 

PROBLEM  No.  25 

Demonstration 

From  the  text  and  solution  of  Problem  No.  24  prepare  a 
trustee's  statement  of  realization  and  liquidation. 


SOLUTION  TO  PROBLEM  No.  25 

Demonstration 

In  problem  number  twenty-four  the  facts  incident  to  the 
realization  and  liquidation  of  the  business  of  W.  B.  Tileson  were 
shown  by  means  of  skeleton  ledger  accounts.  The  accounts 
showed  as  initial  entries  the  items  contained  in  the  balance  sheet 
of  W.  B.  Tileson  at  June  30,  191 2.  These  were  followed  by 
items  representing  the  transactions  of  Arthur  Dixon,  Trustee, 
during  the  period  of  his  incumbency  as  such.  Thus  there 
appeared  if  the  accounts  were  to  be  scrutinized : 

(i)  Assets  and  liabilities  per  books  (as  adjusted). 

(2)  Assets  and  liabilities  not  realized  or  liquidated. 

(3)  Assets   and  liabilities   to  be   accounted   for    (difference 

between  (i)  and  (2). 

(4)  Losses  and  gains  incident  to  realization  and  liquidation. 

(5)  Assests  realized  and  liabilities  liquidated. 

(6)  Balance  of  cash  on  hand. 

The  duty  of  a  liquidating  trustee  is  to  convert  the  assets  into 
cash,  pay  off  the  creditors,  and  turn  the  balance,  if  any,  over  to 
the  bankrupt. 

In  view  of  this,  and  the  foregoing,  it  seems  desirable  that  a 
statement  purporting  to  show  the  transactions  of  a  trustee  in 
winding  up  a  bankrupt  estate  should  be  so  arranged  as  to  bring 
out  such  facts.  The  columnar  form  seems  best  adapted  to  the 
present  purpose  and  is  for  that  reason  made  use  of.  The  improve- 
ment of  such  a  form  of  statement  over  the  "realization  and 
liquidation  account"  will  probably  be  apparent. 

Attention  should  be  invited  to  the  figure  for  expenses  of  ad- 
ministration which  may  appear  to  be  in  error  in  the  amount 
of  14  cents.  This  is  due  to  fractions  of  cents  in  applying  the 
percentage  of  loss  to  the  accounts  of  creditors. 

211 


Elementary  Accounting  Problems 


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Problem  Number  Twenty-Five 

PROBLEM  No.  25A 

Practice 

From  the  text  of  Problem  No.  24 A  and  solution  prepare  a 
trustee's  statement  of  realization  and  liquidation. 


213 


Elementary  Accounting  Problems 


PROBLEM  No.  26 
Demonstration 

The  Hoyt  Machine  Company,  incorporated  January  i,  1900, 
with  an  authorized  capital  stock  of  $50,000,  which  is  now  out- 
standing, has  been  unfortunate  in  having  the  type  of  machine 
which  it  manufactures  superseded  by  new  patents  and  has  been 
authorized  to  dissolve. 

The  balance  sheet  after  closing  on  June  30,  1912,  is  as  follows : 


Assets 

Land  and  buildings $  75,000.00 

Equipment  40,000.00 

Merchandise 25,000.00 

Cash  in  bank 15,867.00 

Accounts  receivable 18,625.00 

Notes  receivable  and  in- 
terest    10,132.00 


Contingent  fund  (securi- 
ities) 


12,500.00 


Total $197,124.00 


Liabilities  and  Capital 

Bond  and  Mortgage  on 
buildings  and  equip- 
ment   $  25,000.00 

Accounts  payable 15,475.00 

Notes  payable  and  interest    10,307.00 

Interest  accrued  on  bond 

and  mortgage 1,500.00 

Reserves : 

Depreciation    buildings 

and  equipment 18,475.00 

Contingencies 12,500.00 

Capital  stock 50,000.00 

Surplus 64,137.00 


Total $197,124.00 


The  transactions  incident  to  realization  and  liquidation  were 
as  follows: 

The  mortgagee  bought  the  land,  buildings,  and  equipment  for 
$120,000,  paying  in  cash  the  difference  between  the  purchase 
price  and  the  amount  of  the  mortgage  and  interest  accrued,  $26,- 
585.30.  The  merchandise  was  sold  for  scrap  iron  at  $1,257.39. 
The  accounts  receivable  were  collected  except  $259.26.  Thie 
notes  receivable  ($10,000)  and  accrued  interest  ($147.50)  were 
collected.  The  securities  in  the  contingent  fund  realized  $12,- 
262.50,  net.  The  accounts  in  favor  of  creditors  were  paid,  as 
were  notes  of  $10,000  with  interest  accured  of  $43.75.  The 
expenses  of  realization  and  liquidation  were  $3,675.24. 

Prepare : 

(a)  Journal  entries  for  the  dissolution  of  the  company. 

(b)  A  statement  of  realization  and  liquidation  showing 
the  amounts  distributed  to  the  stockholders. 

214 


Problem  Number  Twenty-Six 


SOLUTION  TO  PROBLEM  NO.  26  (Demonstration) 
Journal  Entries 

Land  and  buildings $  40,000.00 

To  Equipment $  40,000.00 

Reserve  for  depreciation — buildings  and  equipment       18,475.00 

To  Land,  buildings  and  equipment 18,475.00 

Cash  93,414.70 

Bond  and  mortgage  payable 25,000.00 

Interest  accrued  on  bond  and  mortgage  payable. ..         1,585.30 

To  Land,  buildings  and  equipment 120,000.00 

Cash 1,257-39 

To   Merchandise 1,257.39 

Cash  18,365.74 

To  Accounts  receivable 18,365.74 

Cash 10,147.50 

To  Notes  receivable  and  interest 10,147.50 

Cash 12,262.50 

Expenses  of  realization  and  liquidation 3,675.24 

To  Cash 3,675.24 

Reserve  for  contingencies 12,500.00 

To    Surplus 12,500.00 

Land,  buildings  and  equipment 23,475.00 

Notes  receivable  and  interest 15.50 

To    Surplus 23,490.50 

Surplus   28,006.66 

To  Merchandise 23,742.61 

Accounts    receivable 259.26 

Contingent    fund 237.50 

Notes  payable  and  interest 6.75 

Interest  accrued  on  bond   and   mortgage 

payable 85.30 

Expenses    3,675.24 

Surplus  72,120.84 

To  Capital  stock 72,120.84 

Capital  stock $122,120.84 

To  Cash $122,120.84 


215 


Elementary  Accounting  Problems 


THE  HOYT  MACHINE  COMPANY 

Working  Sheet  Showing  Closing  of  the  Accounts 

Journal  Entries 
Assets  Dr  Cr. 

Land  and  buildings $75,000.00    |  ?^3,475.oo    $130,000.00 

Equipment   40,000.00  40,000.00 

23,742.61 

Merchandise 25,000.00  1,257.39 

122,120.84 

♦Cash  in  bank 15,867.00      135,447.83        29,193.99 

259.26 

Accounts  receivable 18,625.00  18,365.74 

Notes  receivable  and  interest 10,132.00  15.50        10,147.50 

Contingent  fund 12,500.00  237.50 

12,262.50 

$197,124.00 

Expenses—realization  and  liquidation.  3,675.24  3,675.24 
Liabilities  and  Capital 

Bond    and    mortgage,    buildings    and 

equipment   $25,000.00  $25,000.00 

Accounts  payable. ,. 15,475.00  15,475.00 

Notes  payable  and  interest 10,037.00  10,043.75                 6.75 

Interest  accrued  on  bond  and  mortgage  1,500.00  1,585.30              85.30 

Reserves : 

Depreciation,  buildings  and  equipment  18,475.00  18,475.00 

Contingencies 12,500.00  12,500.00 

Capital  stock 50,000,00  122,120.84        72,120.84 

72,120.84 

Surplus  64,137.00  4,516.16        12,500.00 

$197,124.00    $484,450.46    $484,450.46 


♦Details  of  cash  debits  and  credits. 


Dr.  Cr. 

$93,414.70  $25,518.75 

1,257.39  3,675.24 

18,365.74 
10,147.50 
12,262.50 


$135,447.83  $29,193.99 


216 


Problem  Number  Twenty-Six 


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217 


Elementary  Accounting  Problems 

PROBLEM  No.  26A 

Practice 

From  N.  Y.  C.  P.  A.  Examination  of  Janaury  31,  191 1 

The  Sinclair  Trading  Company  has  been  granted  permission 
to  dissolve  its  corporate  existence.  You  are  consulted  about  the 
procedure  of  closing  its  books  and  are  given  the  following  in- 
formation : 

An  abstract  of  the  ledger,  on  July  15,  1910,  discloses:  land 
and  buildings,  $30,000;  plant  and  machinery,  $50,000;  merchan- 
dise inventory,  $22,500;  notes  receivable,  $10,500;  accounts  re- 
ceivable, $16,800;  contingent  fund,  $15,200;  mortgage  bonds  (on 
machinery  and  plant),  $25,000;  accrued  interest  on  the  mort- 
gage, $52;  notes  payable,  $27,000;  accounts  payable,  $28,000; 
capital  stock  (authorized,  issued,  and  outstanding),  $50,000;  re- 
serve for  depreciation  of  plant  and  machinery,  $9,500;  reserve 
for  depreciation  of  buildings,  $1,950;  reserve  for  contingencies, 
$15,200;  surplus,  $798. 

There  is  a  balance  in  the  bank  of  $12,500. 

A  report  rendered  by  the  secretary  of  the  company  shows 
the  result  of  the  realization  as  follows : 

The  mortgagees  bought  the  plant  and  machinery  for  $35,000, 
paying  cash  for  the  difference  between  the  amount  of  the  mort- 
gage, and  the  accrued  interest,  and  the  purchase  price.  The  land 
and  buildings  were  sold  for  $33,000.  The  inventory  of  mer- 
chandise was  disposed  of  for  $20,000.  The  notes  receivable 
were  paid;  the  accounts  receivable  realized  $15,150  and  the  se- 
curities of  the  contingent  fund  realized  $14,700. 

All  notes  payable  and  accounts  payable  were  paid  and  the 
expense  of  realization  and  liquidation  amounted  to  $3,200. 

Prepare : 

(a)  All  closing  entries  for  the  dissolution  of  the  com- 
pany 

(b)  A  statement  of  realization  and  liquidation  showings 
the  amounts  distributed  to  the  stockholders. 

218 


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